Portec Rail Products Beats Estimates, Gets Clobbered
Portec Rail Products (PRPX) released fourth quarter results on Thursday, comfortably beating analyst expectations. The stock promptly dropped 18% to just below $5, continuing a two-week decline from around $7.50.
I'm baffled. Although the rail freight industry is a victim of falling oil prices (which means they lose market share to trucking) and the overall drop-off of the transportation industry, this is not news. Portec has several things going for it. The company has a strong balance sheet, with current assets exceeding total liabilities, and strong cash flow from operations. Total revenue is down slightly from last year, but given the horrible performance of rail stocks in general, the slight sales decline of 2.4% is an excellent performance.
The company's friction management products and services were what first drew my attention to Portec. Because they save fuel and maintenance costs, these should be in increasing demand: orders for new rail cars have fallen sharply. With declining orders, rail companies will have to contend with an aging fleet, boosting per-car demand for maintenance reducing services and rail car repair.
Many of their products are useful for both rail freight and passenger rail/transit application. Their environmental solutions, trackside fault detection safety products, and noise abatement make increasing sense in urban transit environments, meaning that the company should be able to capitalize on any rail transit build-out from the stimulus package.
Although Portec CEO Jarosinski sees a continued difficult freight market in 2009, he is bullish on passenger rail traffic. He says, "We believe that this economic climate provides Portec Rail with opportunities in various markets, whether domestic or international, for our core rail business operating units. We feel that we are reasonably well-positioned with our business to take advantage of these opportunities if the funds are available for investment." While that's not exactly bullish, it's hardly grounds for the sell-off we've seen.
At $5, Portec is trading at a 12 month trailing P/E of 6.2. I see it as a good play on rising oil prices (which I expect), as well as on a rail or rail transit build-out. The 4.8% dividend yield, which can easily be paid out of even the company's seasonally low 4th quarter earnings provides a reward to patient investors, even if the stock does not rebound soon.
For other rail investing ideas, AltEnergyStocks.com Editor Charles Morand will be publishing an article on high-speed rail stocks next week.
Tom Konrad, Ph.D.
DISCLOSURE: Tom Konrad owns shares of PRPX.
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