What a brutal six months it’s been for Greenbrier. The stock has dropped 28.5% and now trades at $47.19, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Greenbrier, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Greenbrier Will Underperform?
Despite the more favorable entry price, we're swiping left on Greenbrier for now. Here are three reasons why we avoid GBX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Greenbrier’s sales grew at a sluggish 2.1% compounded annual growth rate over the last five years. This fell short of our benchmarks. 
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 13.3% gross margin over the last five years. That means Greenbrier paid its suppliers a lot of money ($86.73 for every $100 in revenue) to run its business. 
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Greenbrier’s margin dropped by 12 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Greenbrier’s free cash flow margin for the trailing 12 months was breakeven.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Greenbrier, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 6.9× forward EV-to-EBITDA (or $47.19 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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