Commodity railcar manufacturer Freightcar America, Inc. (RAIL) has been gaining momentum since last year. The stock has gained 414.8% over the past year, during a period in which production and manufacturing remained partially closed due to COVID-19 lockdowns. The stock has remained bullish so far this year also and gained 189.6% year to date.

However, as investors focus on value stocks amid the economic recovery, shares of RAIL have been declining. Shares of RAIL declined 12% yesterday and are  projected to fall further in the near term.

Here’s what we think could shape RAIL’s performance in the near term:

Booming Transportation Industry

The transportation industry is making a strong comeback from  pandemic-driven lows last year, driven by higher freight demand and a faster-than-expected mass vaccination schedule. With the United States on track to beat back the  coronavirus pandemic, the country has partially reopened its freight transportation amid surging commodity prices. Rising cross-border trade has been increasing the demand for durable railcars and accessories across North America. Total North American transborder freight increased 1.7% monthly to $95.90 billion in February 2021.

RAIL has taken several steps to align its operations to capitalize on  rising demand. The company acquired a manufacturing facility in Mexico last year and is said to have begun the production of future rail cars in February. It announced a $25 million reduction in annual fixed costs in October 2020.

Weak Financials and Profit Margin

RAIL generated $108.45 million in revenues over the last 12  months, representing  a 52.8% decline year-over-year. Its trailing-12-month gross loss was  $13.50 million, while its net loss stood at $84.44 million. The company lost $6.29 per share from its operations. Furthermore, RAIL’s liquidity position is delicate because the company is bleeding cash. Its trailing-12-month net operating cash flow and levered free cash flow stood at negative $58.91 million and $53.85 million, respectively.

RAIL’s trailing-12-month ROE and ROA are negative 112.62% and 12.52%, respectively, which is substantially lower than industry averages. Also, the company’s 0.51% asset turnover ratio is 32.2% lower than the 0.75%  industry average.

Price Target Indicates Potential Downside

The stock is expected to hit a median price target of $3.33 soon, indicating a 58% potential downside.

POWR Ratings Reflect Bleak Prospects

RAIL has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

RAIL has a D grade for Value, and F for Stability. Besides its higher-than-industry valuation, RAIL stock has a beta of 2.44, indicating substantial volatility. These justify the Value and Stability grades.

Of the 17 stocks in the C-rated Railroads industry, RAIL is ranked #16. In addition to the grades we’ve highlighted, one  can check out RAIL’s ratings for Momentum, Sentiment, Quality, and Growth here.

There are four stocks in the Railroads industry with an overall rating of B. Click here to view them.

Bottom Line

Though  industry tailwinds and its  share price performance make RAIL look appealing, the company lacks fundamental strength. Its  negative profitability and significant cash outflows make it a highly speculative investment. Hence, we think  it’s best avoided now. 

RAIL shares were trading at $6.43 per share on Tuesday afternoon, down $0.55 (-7.88%). Year-to-date, RAIL has gained 166.80%, versus a 11.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

More Resources for the Stocks in this Article