Model Portfolio athompson:TPSNX

Moving Coal for Less

by Adam Thompson, m10 member and mFOLIO Master

I originally recommended FreightCar America, Inc. (nasdaq: RAIL) at $55.45 (12/29/06). FreightCar America makes railroad cars, primarily coal-carrying railcars. Over the last two months, the prospects for this stock have dimmed considerably, and the stock has fallen to $48.63. It is now pretty clear that the company will exhaust its current backlog by the end of this year. Once they do that, their revenue will fall considerably, and they may even lose money, at least for a few quarters. However, they are diversifying into other types of railcars, and there is a decent chance that demand for coal cars will pick up by the end of the year, around the time their backlog is exhausted. Unfortunately for FreightCar America, TXU Generation has greatly reduced the number of new coal-fired power plants it plans to build (this was part of the terms of the recent buyout of TXU). Since FreightCar America had a large order from TXU, this is a big negative for the stock.

However, FreightCar America's 2006 earnings per share were an incredible $10.07, giving the stock a P/E of less than 5. At that price, I think the stock is still worth buying, even with all the negatives and uncertainties. I believe the price of oil and natural gas will remain high and that coal will therefore continue to be an attractive fuel. At some point, coal cars will need to be replaced, and FreightCar America's earnings will increase. Of course, this depends to a large extent on how willing people are to tolerate the pollution that coal usually produces.

FreightCar America's current assets exceed its current liabilities, even when inventories are excluded from current assets. Its long-term debt, including pension costs, is about $59 million, compared to $204 million in equity, so it is not very heavily leveraged.

Disclosure: I hold this stock in my own accounts and in most of my clients' accounts.