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Bear of the Day: American Railcar (ARII)

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American Railcar (ARII - Free Report) was a Bear of the Day in early December when trading near $48 and analysts were lowering EPS estimates after another earnings miss.

Shares did not move much higher through their $48-49 resistance zone for the next 2+ months until the company's February earnings report confirmed the negative outlook.

The stock fell 20% in two weeks to $39 and analysts took profit projections down further, moving the full-year 2016 consensus estimate from $3.23 to $2.88 in the past 60 days.

That drop equates to negative earnings "growth" of -23% for the year on the back of a 37% decline in sales to $403.6 million.

Here's how my colleague Tracy Ryniec, who has been an active investor in rail car companies for several years, described the outlook on December 7...

American Railcar Industries can't escape the rail car cycle, which is still on a downward trajectory. This Zacks Rank #5 (Strong Sell) is expected to see falling sales and earnings through 2017.

American Railcar makes and sells railcars, specifically hopper and tank cars, custom designed railcar parts and other industrial products. It also leases railcars it manufactures to some markets. Additionally, the company provides railcar repair services through various repair facilities.

Another Miss in the Third Quarter

On Oct 28, American Railcar reported its third quarter results and missed on the Zacks Consensus Estimate by 5 cents. Earnings were $0.94 compared to the Zacks Consensus of $0.99.

It was the second earnings miss of the year for the company.

It continued to see "softness" in the North American railcar market.

Revenue fell 16% to $145 million from $172.7 million in the third quarter of 2015. The decrease came from lower revenue in the manufacturing segment, partially offset by increased revenue in the leasing and railcar services segments.

Manufacturing segment revenue fell 24% to $93.5 million driven by a higher mix of hopper railcars sold, which generally have a lower average selling price than the tank railcars.

Tank railcar demand continues to be challenged as the crude market remains subdued.

(end of December Bear of the Day excerpt)

Classic Value Trap

And Tracey was very suspect of the recent 28% rally in ARII that had occurred in the month prior to her report from early November when shares launched from $36 to $46 (as of December 6). She wrote...

Shares are up big since the election, presumably on the belief that the rails will play an important role as the economy strengthens. And they will. But the railcar orders always move in cycles. Once companies stock up on new cars, it takes several years before the cycle repeats. You can see this in the earnings over the last 10 to 20 years.

Even with the recent rally, shares still appear cheap. They trade with a forward P/E of just 11, well below the average of the S&P 500 which is now at 19.5x.

But be careful. This company doesn't have sales or earnings growth and isn't expected to until at least 2018, at the earliest.

This is a classic value trap.

Tracy obviously nailed that call. When it comes to the rails, she's got her ear to the ground.

And if you remain optimistic about the economy and rail traffic demand in particular, thinking that we've seen the worst news priced-in, there may still be better buying opportunities ahead in these names.

Until the sales and profit pictures turn around, there's no hurry. The Zacks Rank will let you know.

More Stocks to Sell. Now.

Beyond our Bear Stock of the Day, today's list of 220 Zacks Rank #5 Strong Sells demand even more urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. Many appear to be sound investments but, since 1988, such stocks have actually performed more than 6X worse than the S&P 500.

See today's Zacks "Strong Sells" absolutely free >>

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