Why isn't backlogged rail car production not considered a problem?

[jerichowhiskey]

It is a good thing for there to be demand, but why is a huge backlog of railcars to be produced considered "strong"? Shouldn't they be expanding their manufacturing facilities to accommodate the demand and deliver on-time?

Railway Age

Fourth-quarter railcar orders, deliveries, and backlogs showed robust activity, according to the Railway Supply Institute's American Railway Car Institute Committee (ARCI) data released Thursday, Jan. 23, 2014. Tank cars, in particular, continued to show robust activity.


Industry orders for the fourth quarter were 14,856, of which 4,916 were tank cars and 9,949 were (other) freight cars. That was up 3,799 cars, or 34%, from the 11,066 on order in the fourth quarter of 2012, and also up 2,112 cars, or about 16.5%, from the third quarter 2013 total of 12,753.

Deliveries for the fourth quarter totaled 15,776 railcars, up 3,961 cars, or 33.5%, from the 11,815 delivered in the fourth quarter of 2012, and also up 3,129 cars, or 24.8%, from the third quarter 2013 total of 12,647.

"Within those deliveries, 8,440 were tank cars, while 7,336 were freight cars. That is the largest single-quarter tank car delivery number ever, besting 3Q13's 7,589," noted KeyBanc Capital Markets, Inc. analyst Steven Barger, in a note to clients Thursday breaking down the delivery numbers.

The backlog at the end of the fourth quarter (and the 2013 year) was 72, 937 units, "down 1% sequentially from the 3Q13 backlog of 73,848, although the mix shifted toward freight cars," Barger noted.

 

[Anderson]

Simple: The backlog means there's guaranteed business without any hiccups (remember, orders likely come in irregularly at various companies). From those numbers, it looks like the industry has an order pipeline that runs 12-15 months. You honestly want a "backlog" of at least six months so you can plan ahead with materials and scheduling and not have lots of erratic downtime in your production lines. Having a bit more means you can tell your shareholders that you have more or less guaranteed profits for the next year, and your employees have job security for that time. If you have no "backlog", that means you're constantly looking for orders to keep your lines running.

Also remember, the letter is from the standpoint of the builders of the railcars, not the freight railroads or car rental companies placing the orders.

 

[Nathanael]

In railways and aircraft, a manufacturing company wants a "backlog" between 12 months and 30 months, roughly speaking. More than 30 months and you start losing business to your competitors. Less than 12 months and you start having to idle production lines.

I've looked at these companies from an investment perspective.

 

[RRUserious]

Maybe the "problem" isn't the backlog, it is the desire of freight shippers to ship product NOW rather than adjusting to what I'd call a normal flow of new cars.

 

[cirdan]

Maybe the "problem" isn't the backlog, it is the desire of freight shippers to ship product NOW rather than adjusting to what I'd call a normal flow of new cars.

I think you have to see it on a case by case basis. If the manufacturer is dishonest and signs a deal pretending they will start work right away while in reality they have a 12 month backlog and the new order is being added on the far end of the backlog, yes, that is wrong.

But I think railcar manufacturers don't sell like that. The customer knows they're not getting the equipment right away. The order is thus embedded in the long term planning rather than for immediate use. If a railroad unexpectedly lands a big shipping contract and doesn't have the equipment to handle it, then rented or second hand equipment is the better option anyway in the short run because it can be delivered much more quickly. If it's just abouit replacing existing equipment one on one, then it's just a question of adjusting maintenance so the odl stuff will last until the new arrives.

 

[MIrailfan]

so if the backlog got close to 30 months then that would be the time to expand production?