Tight Conditions Not Helping Rail-Car Services
As tight as the freight and trucking industry is right now you’d think that Trinity Industries (NYSE:TRN) would be booming too. Capacity within the trucking industry is so tight that operators of all levels are offering unprecedented incentives and compensation just to attract drivers. Lack of capacity is also leading to YOY increases in costs that will soon be felt by the consumer. This is not the case in the rail industry, at least not when it comes to rail cars and rail car services, anyway. Companies like Trinity Industry and The Greenbriar Companies (NYSE:GBX) have not only seen their revenues decline in the wake of the pandemic but revenue continues to decelerate and that’s not good for share prices.
It’s Not All Bad News For Trinity Industries
As bad as the pandemic was for the railcar industry the Q4 results are not all bad news for Trinity Industry. The $415.7 million in revenue is down -51.1% from last year and a deceleration from the previous quarter but it beat the consensus by 440 basis points. Unfortunately, that’s where the good news ends because the “strength” in revenue did not carry through to the bottom line. On the bottom line, the GAAP loss of -$1.13 is $1.22 below the consensus with adjusted earnings showing weakness as well. On an adjusted basis the company was able to post a profit albeit a small $0.04 per share and $0.07 below expectations.
Digging into the data there is some mitigating data to be aware of, primarily the cause of GAAP EPS weakness. The company made a substantial investment into its lease-fleet of railcars bringing the total up 3.5% on a YOY basis. This has the company set up to meet demand as it rises and demand is rising, if slowly. The company’s lease-fleet utilization rate held fairly steady at 95% YOY in evidence of this fact and early indications are that it will continue to hold steady if not improve in 2021.
On the new rail car end of the business, the outlook is not as good and offsets any signs of improvement in the leasing business. The company delivered 2,235 new cars in the 3rd quarter but only received 1,170 orders and suggests weakness in this segment will continue at least for another quarter. Based on the CEO commentary, it may be another two or three quarters before demand picks back up. The upshot is that, when it does, it may rebound strongly.
“Market uncertainty as it relates to COVID-19 remains the predominant story on the economic and rail industry outlook. We see early indicators of recovery with improving year-over-year railcar traffic volumes, slowing train speeds, and, more importantly, higher overall cycle times for shippers, all of which require more railcars to return to service. However, given the pace of improvement, customers are hesitant in their long-term planning for railcar assets. Industry forecasts currently suggest a recovery in the second half of 2021, and our customer inquiry levels align with these expectations.”
The Trinity Industries Dividend Is At Risk
Trinity Industries pays an attractive 2.75% yield but it looks risky to us. Not only is the 2020 payout ratio running above 150% but the balance sheet isn’t as strong as it could be. In fact, the company carries a high level of debt, very little cash, and incredibly tight FCF so we are not expecting robust dividend increases to continue. The outlook for 2021 earnings is much better than 2020 and the payout ratio improves but not enough to make us want to rush right out and buy this stock. If anything, investors should wait for this one to pull back and buy-in once the rebound in railcar demand (and dividend support) is more visible.
The Technical Outlook: Trinity Is Ripe For Correction
If the 56X trailing and 28X forward earnings aren’t enough to make you shy away from this stock the 15% short-interest should. Where some stocks are ripe for a short-squeeze, this one is ripe for a correction and it is already underway. With shares down more than 7.0% following the release of Q4 results and a very uncertain outlook it is unlikely that support will continue to hold. A break below the 30-day moving average near the $30 level would be very bearish and could take this stock down to the $24 to $26 range.
Companies in This Article:
