Thursday, August 6, 2009

American Railcar Earnings/CIT Exposure

Ah, the things we can learn by listening to earnings conference calls. Interesting tidbit came out during American Railcar's (ARII) call. They have some serious exposure to CIT not only from the current quarter's earnings, but large part of their order backlog.

American Railcar Industries Inc. reported an 82 percent drop in profit in the second quarter, prompting the company to foreshadow more layoffs.

The covered hopper and tank railcar manufacturer (Nasdaq: ARII) also raised concerns about how the troubles of its largest customer, struggling commercial lender CIT Group Inc., may hurt business.

CIT, which is trying to avoid bankruptcy, accounted for 13 percent of American Railcar’s revenue in the second quarter and accounts for 53 percent of orders included in the backlog of 1,770 railcars as of June 30.

In the event of a bankruptcy, CIT, among other things, may have the right to
cancel or could renegotiate its orders included in the backlog.

Even if CIT does not seek bankruptcy relief, any continued financial difficulties of CIT could materially adversely affect American Railcar’s business relationship with CIT and its financial condition, American Railcar said.

"We are going to lose some orders if they file for bankruptcy," said Dale Davies, chief financial officer. "We build a lot of cars for them."

The earnings numbers aren't real significant as I knew they would be very weak. This is a very cyclical business, but if you want to buy the stock for cheap, you need to buy at it the low point of the cycle. This CIT exposure throws a wrench into things though. I'm not entirely plugged into the CIT situation, but I can't say this gives me confidence to buy the shares, especially when there are alternatives.

Disclosure: None


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