2023-05-31 04:59:51 ET
Summary
- Trinity Industries reports a 36% YoY revenue growth in Q1, with an optimistic outlook for the year and an expected EPS of $1.5-1.7.
- TRN's railcar leasing segment is highly profitable, with lease fleet utilization at 98.2% and increasing margins, while the rail products segment sees a 62% YoY revenue increase.
- Despite a high net debt/EBITDA ratio, Trinity's strong revenue growth, low forward P/E, and dividend yield make it a solid investment option for exposure to the trend of reshoring manufacturing in the US.
Investment Summary
Trinity Industries Inc ( TRN ) is an established company in the industrial manufacturing sector, with a primary focus on the rail transportation industry. They offer a wide range of railcars, railcar components, and leasing services. Trinity also operates in the infrastructure and construction industries, providing concrete, aggregates, and related construction services.
Starting the first quarter of the year, the company they surprised by growing revenue 36% YoY and also maintaining a decent FCF of $36 million. The outlook for the year is optimistic and EPS is expected to come in around $1.5 - $1.7, making the forward p/e for the company quite low, at under 15. With a dividend yield of over 4% and a solid history of buying back shares, I think TRN is a strong addition to most investors' portfolios.
Quarterly Result
As mentioned before, the company had a very successful start to the year with growing revenue 36% YoY, mainly driven by an increase in production and further optimization of the business.
Some interesting key numbers are that the lease fleet stood at 98.2% for the quarter. This is great to see given that the railcar leasing segment of the business is by far the most profitable. The margins were also increasing for the quarter, as highlighted by CEO Jean Savage, "In our Railcar Leasing and Management Services Group, lease rates and utilization improved again. The Future Lease Rate Differential improved sequentially to 44.3% giving us optimism about lease rates continuing to increase this year". A continuous increase in the margins like this makes me very hopeful that the company will grow its cash flows efficiently over the coming years and that it will translate into dividend raises and strong buyback budgets.
The company also managed to gather up another 2,690 railcar orders which helps make the 2023 guidance of 40,000 - 45,000 industry railcar deliveries possible. Looking at the rail products segment of the business it is also seeing strong momentum. Going from $391 million in revenues a year ago to $637 million, a very impressive increase. With revenues increasing 62% YoY here, it makes me even more optimistic to see the operating profit taking an even bigger leap upward percentage-wise, going from $0.8 million in 2022 to $25.3 million in 2023. Operating margins ended up being 4% for the quarter.
The market for rail seems to remain strong despite the ongoing fears of a recession and slowdown in the economy as a result of lessened spending by companies. Companies are moving back production to the US and as a result of this, the use of rail will very likely grow as companies need to ship their products efficiently domestically. Going forward I think it will be key to watch the development of the margins more than anything. That would provide further cash flows for the company, used to continue making the company able to perform acquisitions as they have.
Financials
Moving over to the financials of the company I think they are in great shape right now. The company has been able to grow the total assets on a QoQ basis with the cash position improving, which is something I have started to look at more than ever in this market environment. With a solid cash position, it really eases up the company and lets them be a little more spontaneous with spending and acquisitions. In the long run, I think it benefits investors greatly as the company is able to grow revenues at impressive rates.
Comparing the cash position to the long-term debts, however, I see there is still room for growth. The $81 million in cash isn't enough to do too much against the $700 million in debt. Ideally, I would have liked to see the company have around 30% of the long-term debts as cash at all times. This would make me more comfortable about their financial state. But for now, we will have to do with the cash flows instead. The first quarter cash flows from operations landed over $100 million and as mentioned before, the company seems to be on an uptrend with the margins so I expect to see great cash flows generated going into the coming 3 quarters of the year. Especially as the most profitable part of the business is growing at a nice rate and the largest segment, the rail products saw an incredible 62% YoY increase in revenues.
All in all, I think the finances of TRN are sound. They do have a very high net debt/EBITDA ratio currently, sitting at above 11 which does make me a little worried. However, as mentioned before the company seems to be growing revenues at a strong rate and the market outlook suggests they will continue seeing demand. But having that said, seeing a decrease in this ratio would make me even more confident in the long-term outlook for investment in TRN.
Risks
Some of the more prominent risks that face TRN right now I think is that they fail to capture market share in the rail industry. They aren't the only company operating as a provider to the industry, so securing stable partnerships will help with the long-term outlook of growth.
As mentioned, de-globalization is happening so I do expect the company to continue seeing demand on an increasing QoQ basis. If there is a shook and the company fails to grow then that would have me very worried. Besides that, looking at the order log for the company will be of great use. If I see a decrease in the orders the company is gathering up or there is a general slowdown then I think it won't be long until the valuation has to be reconsidered downwards instead. But so far the momentum seems to hold up.
Valuation & Wrap Up
Right now I think TRN can offer investors with great exposure to the ongoing trend of moving manufacturing back to the US. They play a vital role in supplying the vehicles that help transport goods across the country. The companies rail product segment is growing at impressive rates and I see them being able to grow the cash flows efficiently which would make the debt position seem even more manageable.
With the forward P/E at just under 15 and a dividend yield close to 5% I think investors are getting a great deal here. It should be mentioned TRN has one of the best buyback histories I have ever seen. The outstanding shares have gone from 146 million in 2018 to 84 million in 2022, a yearly decrease of around 11%. In the long run, I think this is also a main driver behind value appreciation and EPS growth for the company. If it's not clear yet, I am rating TRN a buy at these levels. A great option to gain exposure from deglobalization and reshoring manufacturing back to America.
For further details see:
Trinity Industries: Ramping Up And Growing Margins