FreightCar America. A name synonymous with industrial grit, the rumble of steel on steel, and the unsung heroics of North American freight transport. But buried in their recent Q1 2024 earnings transcript lies a seemingly contradictory clue – a potent signal hidden in plain sight that could upend conventional wisdom about the railcar market.

On the surface, things seem sluggish. FreightCar America reported a lower-than-expected 384 unit order intake for the quarter, echoing a trend of cautious CapEx spending seen across the industry. Pundits point to economic uncertainty, rising interest rates impacting leasing costs, and improving rail velocity as factors prompting buyers to hold back. But what if this cautious dance is masking a deeper reality?

Let's rewind to FreightCar America's Q4 2023 earnings call (source). Back then, the company cited a strengthened Mexican peso and border closures as significant headwinds, impacting adjusted EBITDA by a substantial $5 million for the full year. Fast forward to Q1 2024, and the company reiterates its commitment to operational excellence and increased productivity at its Castanos, Mexico facility. They're doubling down on Mexico, even in the face of a strong peso. Why?

The answer, we believe, lies in a fascinating interplay between currency fluctuations, labor costs, and surging demand for *specific* types of railcars. While a strong peso might seem to increase production costs in Mexico, FreightCar America's strategic focus on in-sourcing fabrication, coupled with their disciplined commercial strategy, suggests they're mitigating the currency impact by becoming *even more* cost-competitive.

Here's our hypothesis: FreightCar America is betting on a shift in railcar demand, anticipating a surge in orders for cars catering to chemicals, agricultural products, and metals – sectors expected to drive car loading volume growth in 2024. This shift aligns perfectly with the company's expanded product portfolio and their Castanos facility's ability to produce a broader range of car types.

The numbers paint a compelling picture. FreightCar America reported record quarterly deliveries of 1,223 railcars in Q1 2024, demonstrating the plant's operational prowess. They're maintaining their full-year revenue guidance of $520-$572 million, a 52.5% increase year-over-year at the midpoint. And despite the initial dip in Q1 gross margins due to startup costs associated with launching the fourth production line, the company expects sequential improvement throughout the year, driven by a shift in backlog mix and operational efficiencies gained from the fully staffed and built facility.

"With the build out of the facility complete, we are well positioned to focus on operational excellence, i.e., efficiency and scale in accordance with our market momentum... Likewise, we remain confident for the full year and reiterate our stated guidance for 2024. - Nick Randall, FreightCar America Q1 2024 Earnings Call (source)"

Projected Railcar Deliveries and Adjusted EBITDA Growth

The following charts illustrate FreightCar America's projected growth in railcar deliveries and adjusted EBITDA for 2024.

Here's where the peso paradox comes in. By leaning into its Mexican manufacturing footprint, even with a stronger peso, FreightCar America is positioning itself to become the go-to supplier for customers seeking cost-effective, high-quality railcars in the high-demand segments. As order activity inevitably picks up in the latter half of the year, the company's strategic positioning, coupled with their impressive operational capabilities, will allow them to capitalize on this anticipated demand surge.

The strong peso, then, isn't a sign of weakness, but a shrewd calculation. FreightCar America is using it as a springboard to propel itself to the forefront of the industry, capitalizing on a subtle shift in the market that most analysts have yet to grasp. It's a bold move, a strategic gamble, but one that could pay off handsomely. Keep your eyes on FreightCar America. They might just be the quiet giant about to roar.

"Fun Fact: The average freight train is about 1 to 2 miles long and can carry the equivalent of hundreds of truckloads! This makes rail transport a significantly more efficient and environmentally friendly option for moving goods across long distances."