UBS Upgrades FreightCar America, Says Benefits Of Transformation Are Taking Hold

In a report published Thursday, UBS analyst Eric Crawford upgraded the rating on FreightCar America, Inc. RAIL from Sell to Neutral, while lowering the price target from $24 to $22. The analyst believes that the company is now well positioned to benefit from its transformation to a general-freight railcar manufacturer from being a coal-centric railcar one.

"We believe the up-front headwinds associated with this transformation have peaked (facility procurement and expansion costs, employee training, initial manufacturing inefficiencies, etc.), and we believe RAIL is now positioned to deliver improved results," Crawford elaborated.

On the other hand, the analyst also believes that the company would only be able to marginally benefit from an increase in industry demand for railcars, which is expected at least through 2016, driven by railcar traffic, fleet age and expectations of growth in the downstream markets.

"Moreover, the railcar cycle has already matured to the point where deliveries are likely to exceed orders," the UBS report said, adding "As such, RAIL, whose gross and operating margin profile already lags peers, is likely to face an intensifying competitive dynamic for new railcar orders, potentially pressuring margins."

The EPS estimates for 2016 and 2017 have been raised to reflect increased deliveries and operating leverage. However, the EPS estimates for 2015 and 2016 remain below the consensus forecasts.