Over the past six months, Greenbrier’s stock price fell to $42.01. Shareholders have lost 9.5% of their capital, which is disappointing considering the S&P 500 has climbed by 11.3%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Greenbrier, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Is Greenbrier Not Exciting?
Even with the cheaper entry price, we're cautious about Greenbrier. Here are three reasons we avoid GBX and a stock we'd rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Heavy Transportation Equipment company because there’s a ceiling to what customers will pay.
Greenbrier’s units sold came in at 2,400 in the latest quarter, and they averaged 21.1% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Greenbrier might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Low Gross Margin Reveals Weak Structural Profitability
Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.
Greenbrier has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 13.9% gross margin over the last five years. Said differently, Greenbrier had to pay a chunky $86.12 to its suppliers for every $100 in revenue. 
3. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Greenbrier posted positive free cash flow this quarter, the broader story hasn’t been so clean. Greenbrier’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7%, meaning it lit $7.02 of cash on fire for every $100 in revenue.
Final Judgment
Greenbrier isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 10.2× forward P/E (or $42.01 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
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