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Saturday, December 5, 2009

Nice to Have Cash - China's Railroad Plans vis-à-vis U.S. Plans + RR Car Companies

A WSJ article this week, "House Transport Panel Head Seeks $69 Billion in New Spending", discussed a "looming shortfall in transportation funding". The initial economic stimulus package included "$48 billion for highway, transit and rail projects", which was roughly half the amount the panel was seeking.

An August article in Fortune, "China's Amazing New Bullet Train (It Leaves America in the Dust)", is worth a read and includes a side by side comparison of China's plans versus those of the United States. We include the summary table here for general interest (click to enlarge or go directly to article via above link):

On a somewhat related note (but commercial railroad side), shares of railroad related companies Greenbrier Companies (GBX), American Railcar Industries (ARII), and Trinity Industries Inc. (TRN) recovered smartly from lows despite still negative traffic trends. Signs of economic stabilization and recovery hopes are likely fueling gains.

We've no position in the names and, of the three, we only performed research on Trinity Industries in mid-2008. Our conclusion then was to recommend a sale of the stock (in the $30s) given uncertain fundamentals, high leverage, and no history of free cash flow generation (primarily because of large investments in a railroad car leasing business). In this case, the sell call was timely, although we missed the recent rebound given our focus on other areas and types of companies.

The good news for investors is that the company is now generating free cash flow on inventory liquidation (positive working capital benefit) and reduced capital expenditures. The free cash flow is being used to strengthen the balance sheet.

Happy investing,

Jeffrey Walkenhorst

Disclosure: no positions.

© 2009 Jeffrey Walkenhorst
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