Summary
- Trinity Industries has done well to continue growing, and backlog data suggests that trend isn't over just yet.
- Profits have risen nicely, taking some cash flow figures higher as well.
- Though shares aren't exactly cheap, they do likely have a good chance of outperforming the broader market moving forward.
One of the first companies I ever bought shares in was railcar operator Trinity Industries ( TRN ). At that time, however, the company had multiple other operations beneath its belt that were ultimately spun off into a separate publicly traded company. Every so often, I like to come back and revisit the firm to see how things have changed and to see what kind of upside potential, if any, the company might offer investors. Based on the data currently available, I do believe that the company does seem to offer a bit of upside from here.
A tricky situation to be in
The last time I wrote an article about Trinity Industries was over a year ago in the middle of December of 2021. At that time, I talked about how the company was showing some signs of a recovery following the COVID-19 pandemic. Unfortunately, because of its business model, it was lagging the broader economy. But the overall trajectory looked positive and shares looked attractively priced to the point that I could rate the business a 'buy'. Since then, the firm has done as I expected. You see, while it would be great to see shares appreciate, any rating to me is always done in relation to the broader market. So to me, a 'buy' rating reflects my belief that the company should generate performance that exceeds what the S&P 500 will do over the same period of time. And that is exactly what happened, with the S&P 500 plunging 13.7% while shares of Trinity Industries have generated downside for investors of only 5%.
This kind of return disparity makes sense when you dig into the numbers. For the 2022 fiscal year , for instance, sales of the business came in at $1.98 billion. That represents a sizable increase over the $1.52 billion the business reported one year earlier. This sales increase was driven by robust revenue associated with the company's Rail Products Group. This is the portion of the company responsible for producing and selling railcars. For the 2022 fiscal year, sales for that segment jumped 64% compared to the 2021 fiscal year. This was driven by 13,315 railcar deliveries for the year, a number that was up from the 8,875 delivered one year earlier. Meanwhile, the Railcar Leasing and Management Services segment of the company grew a much more modest 4.8%. Although this may not sound all that great, it is important for this segment to grow since it accounts for 87.7% of the company's revenue despite representing only 27.1% of the company's revenue. During this one-year window, the company saw the number of rail cars in its fleet grow from 136,100 to 141,675. This includes wholly-owned, partially-owned, and investor-owned railcars. For its company-owned railcars, the fleet utilization for the firm also expanded during this time, rising from 95.7% to 97.9%.
This surge in revenue brought with it a surge in profits as well. Net income shot up from $39.5 million in 2021 to $86.1 million in 2022. It is true that operating cash flow managed to fall year over year, declining from $615.6 million to only $9.2 million. But if we adjust for changes in working capital, it would have declined much more modestly from $279.2 million to $270.2 million. Meanwhile, EBITDA the company also expanded, rising from $512.5 million in 2021 to $608.9 million in 2022.
Results for the company remained strong for the most part even throughout the final quarter of the 2022 fiscal year. Sales came in at $591.2 million. This translated to a 25.2% increase over the $472.2 million the company reported the same quarter one year earlier. Profits more than doubled, skyrocketing from $15.8 million to $37.9 million. It is true that operating cash flow worsened, falling from $196.8 million to $61.8 million. But if we adjust for changes in working capital, it would have fallen more modestly, but still quite a bit, from $80.1 million to $59.5 million. The good news is that this pain was offset to some degree by the fact that EBITDA for the company rose from $129.1 million to $184.6 million.
Given the broader economic concerns that we are dealing with, I can understand why some investors might be bearish regarding this particular name. However, I think that we have more positive things than negative going for the company right now. For starters, in December of last year, management announced a $250 million share repurchase program. Historically speaking, Trinity Industries has a solid track record of buying back stock. Between the end of its 2020 fiscal year and the end of its 2022 fiscal year, the company repurchased 27.4% of its outstanding shares. This ultimately cost investors around $1.08 billion. This will not stop the company from continuing to invest in its own operations. For the 2023 fiscal year, the firm is planning to spend between $250 million and $350 million into its lease fleet. Management also, in early January, announced the acquisition of Holden America, a business that produces multi-level vehicle securement and protection systems, gravity outlet gates, and gate accessories for freight rail throughout North America. That cost shareholders $70 million in cash, plus a commitment to pay another $5 million over the next two years.
When it comes to the 2023 fiscal year, the only real guidance that management provided was for earnings per share, excluding non-core operations, of between $1.50 and $1.70. Assuming the company doesn't pay back any additional stock, this would translate to net income of $134.7 million. Since I don't typically value the company based on net profits but, instead, focus on cash flows, we don't really know what to expect from a cash flow perspective for the year. But it's safe to assume that 2023 is likely to be better than 2022 was. The company also boasted $3.9 billion in backlog as of the end of the 2022 fiscal year. That's more than double the $1.5 billion that the company reported at the end of the 2021 fiscal year. This was driven largely by a surge in the number of unit orders for its railcars from 13,870 to 31,905. this is certain to prove bullish for the company during what would otherwise be a down cycle. It is worth noting that 15,000 of the rail cars it has either produced or will soon be producing are associated with a single order involving newly-built tank and freight rail cars that will be completed over the next six years. $1.8 billion worth of backlog comes from that particular arrangement.
Using the data from the 2022 fiscal year, I calculated that the company is trading at a price to adjusted operating cash flow multiple of 8.5. That's up only marginally compared to the 8.3 reading that we get using data from the 2021 fiscal year. Meanwhile, the EV to EBITDA multiple should come in at 13.1. That stacks up nicely against the 15.5 reading that we get using data from the year prior. As part of my analysis, I also compared the company to five similar firms. On a price to operating cash flow basis, only three of the firms had positive results, with multiples ranging between 14.8 and 75.6. In this case, Trinity Industries was the cheapest of the group. Meanwhile, using the EV to EBITDA approach, the range was from 7.7 to 15.4. In this case, four of the five companies are cheaper than our target.
Company | Price / Operating Cash Flow | EV / EBITDA |
Trinity Industries | 8.5 | 13.1 |
Westinghouse Air Brake Technologies ( WAB ) | 18.3 | 15.4 |
FreightCar America ( RAIL ) | N/A | 7.7 |
Greenbrier Companies ( GBX ) | N/A | 12.2 |
Terex ( TEX ) | 14.8 | 9.3 |
Manitowoc ( MTW ) | 75.6 | 7.9 |
Takeaway
Fundamentally speaking, I can see why some investors might be a bit concerned about Trinity Industries at this time. However, the firm has robust backlog, has done well to continue growing its top and bottom lines, has actively repurchased shares, and is trading at a level that, while not exactly cheap, isn't expensive. From what I can see, all of this makes the company attractive enough to warrant a 'buy' rating at this time.
For further details see:
Trinity Industries: Further Upside Lies Ahead