American Railcar Industries Inc.

American Railcar Industries Inc. (ARII - Snapshot Report) delivered positive earnings surprises in three out of the last four quarters, outpacing the Zacks Consensus Estimate by an average earnings surprise of 77.83%. This leading manufacturer of hopper and tank railcars is expected to derive huge benefits from the booming U.S. freight railroad industry going forward.

Growing demand for railcars, strong order backlogs, and improved pricing helped American Railcar Industries become a Zacks #1 Rank (Strong Buy) on May 3, 2012.

Strong First Quarter

On April 25, American Railcar Industries reported robust financial results for the first quarter of 2012, including net earnings per share of $0.56 that beat the Zacks Consensus Estimate by an outstanding 107.41%. The result also reversed the year-ago quarter’s net loss of $0.25. Total revenue of $181.6 million surpassed the Zacks Consensus Estimate by 9.35% while improving more than 114% year over year.

American Railcar improved margins across the board in the first quarter. Quarterly gross margin was 16.72%, an improvement of 10.9% over the prior-year quarter. Operating margin was 13.11%, up 15.4%, and net margin was 6.61%, up 12.9%. Adjusted EBITDA was $30.32 million, compared with just $3.74 million in the prior-year quarter.

Strong demand for railcars, an improved pricing environment, and positive economies of scale are primarily attributable for this exceptional performance. During the first quarter, the company shipped 2,200 railcars and received orders for 1,860, resulting in an order backlog of 6,190 railcars on March 31, 2012 compared with 6,530 on December 31, 2011. Importantly, in April 2012, it received orders for an additional 2,300 railcars, reflecting the strong growth potential of American Railcar.

Attractive Earnings Estimate Revisions

Estimates for American Railcar have been rising significantly over the last 60 days. The Zacks Consensus Estimate for fiscal 2012 moved up 51.75% to $2.17, while it increased 26.9% to $2.50 for 2013. The current Zacks Consensus Estimate for fiscal 2012 indicates a gigantic growth of 987.5% year over year. Furthermore, the current estimate for fiscal 2013 implies year-over-year growth of another 14.79%.

Valuation Looks Compelling

Valuation of American Railcar looks reasonable. The current forward P/E of 11.66x implies a premium of 22.1% over the peer group average of 9.55x. However, with respect to the Price/Sales multiple, the stock is currently trading at 0.88x, an attractive discount of 54.55% from the peer group average of 1.36x.

Chart Shows Growth Potential

The price and consensus chart is showing robust earnings growth potential as depicted by the widening gap between the estimate lines of 2011, 2012 and 2013. This uptrend should encourage investors as the stock is likely to continue with its growth riding on a strong U.S. railroad industry. The 2012 and 2013 estimate lines are well above the stock price, indicating that American Railcar is currently undervalued.

Headquartered in St. Charles, Missouri, American Railcar Industries Inc. was founded in 1988. The company is a leading North American manufacturer of covered hopper and tank railcars. American Railcar also leases railcars to third parties. Additionally, it offers railcar repair services, engineering and field services and fleet management services.