My previous cautious thesis about Greenbrier (NYSE:GBX) did not age well because the stock delivered return approximately in line with the broader U.S. market since September 2023.

The stock rallied primarily because of the improving earnings revisions record, which were fueled by favorable industry conditions and the management's prioritization in maximizing operational efficiencies. Despite positive trends in financial performance, the stock's seasonality suggests that buying in July might be not a good idea. Moreover, the valuation looks very unattractive, and insiders' activity suggests that they also likely do not see much further upside for the stock. All in all, I reiterate my "Hold" rating.

Recent developments and earnings preview

The latest quarterly earnings were released on April 5 when GBX surpassed revenue and EPS consensus estimates. Despite revenue dropped by 23% YoY, the adjusted EPS expanded from $0.99 to $1.03. The revenue growth drop is explained by the company's pivot to profitable growth, and the EPS dynamic suggests that the turnaround is keeping up well.

The bottom-line improvement was achieved as a result of the improved operating leverage. The gross margin expanded from 10.4% to 14.2% YoY, and the operating margin improved from 5.2% to 6.8%. The management's initiatives in improving operational efficiency are working. Nevertheless, the free cash flow was negative, and the balance sheet is still highly leveraged with the total debt above the company's market cap. Over the long term, GBX's highly leveraged balance sheet might lead to trade-offs between deleveraging and driving dividend growth.

The upcoming earnings release is scheduled for July 8. Consensus estimates expect FQ3 revenue to be $921 million, about 18% lower on a YoY basis. The adjusted EPS is expected to expand by one cent despite revenue decline. Wall Street analysts are quite positive about the upcoming earnings release with 5 EPS upgrades over the last 90 days.

Greenbrier's earnings surprise history is robust, but not flawless. There were three quarters with EPS misses and one quarter with revenue miss over the last two years. Looking at historical prices of GBX, the stock is rarely a big mover on the earnings release day.

According to the latest earnings call, market conditions for the railcar leasing are quite positive and the demand across railcar types is stable, which fuels new builds and lease renewals. This is a good sign, suggesting that GBX might continue delivering positive surprises. Moreover, the management reiterated its commitment to drive further cost efficiency, which is also quite beneficial for shareholders. On the other hand, the company's TTM operating margin is still far below its past decade's peaks, meaning that there is still a long road to go.

From the stock seasonality perspective, buying in July looks like a fifty-fifty game, as long-term trends suggest that GBX was positive only in half of cases in July. Moreover, historically, August has been weaker than July. This means that buying GBX in mid and late summer might not be a good idea.

Valuation update

GBX increased by 14% over the last twelve months, notably lagging behind the broader market. The first half of 2024 was decent for the stock with a 10% YTD return. The stock has a solid "B-" valuation grade from Seeking Alpha Quant because its current ratios are mostly substantially lower than the sector median and historical averages.

I use DDM to proceed with my valuation analysis. In the below table, I figure out Greenbrier's cost of equity using the CAPM approach. The required rate of return for GBX's DDM calculations is 13.1%.

According to consensus estimates, Greenbrier's expected FY 2025 dividend per share is $1.34. Forward dividend per share growth rate is 7.5%. Despite an aggressive dividend growth assumption, Greenbrier's fair value per share is about two times lower than the last close.

I tend to believe DDM's outcome more, which means that it is difficult to call GBX stock attractively valued. The company's below 1 price-to-sales ratios should not mislead investors because GBX's profitability is razor-thin with the FCF margin consistently negative over the last three years.

Another factor that shows that the valuation is highly likely not attractive is the dynamic of insiders buying and selling. The last time insiders bought GBX was 35 weeks ago, and most insiders' activity was selling the stock. The fact that insiders are very rarely buying likely means that they also do not see upside potential from the current price.

Risks to my cautious thesis

The most apparent risk to my cautious thesis is that my previous "Hold" rating for GBX did not age well. The stock grew approximately in line with the S&P 500, which I consider a solid dynamic for investors.

Share price significantly depend on trends in earnings revisions, and GBX looks quite strong from this perspective. Consistent EPS upgrades might continue, which will be a robust positive catalyst for the stock price. Moreover, the EPS growth is expected to accelerate in FQ4.

GBX has solid momentum, which is another factor that might support the rally. The last three months' pullback might be perceived by investors as a good buying opportunity, which will spur the stock price growth once again.

Bottom line

To conclude, GBX is still a "Hold" in my opinion. Yes, my previous cautious thesis did not age well, but the valuation became extremely unattractive after the rally of recent months. Fundamentals are improving, but I think that all the positives are already incorporated into the stock price.