Solid Growth And Good Prospects Make Trinity Industries Attractive

seekingalpha11-20 01:12

Trinity Industries has a Strong Buy rating from Seeking Alpha’s Quant system and a Buy rating from me, with a modest price gain expected.Trinity's revenue, EBITDA, and net income have risen steadily ...

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But it has had one for Trinity Industries, Inc. (NYSE:TRN) since June 27, 2024. Wall Street analysts expect earnings to shrink modestly in 2025. My analysis of the fundamentals shows that its revenue, EBITDA, and net income have risen steadily over the past four quarters. What's more, there is no indication of troubles ahead for the company or the railcar industry. I have a Buy rating for the company and expect a modest price gain in the coming year. About Trinity The company, along with its subsidiaries, provides railcar products and services, including railcars themselves. It offers railcar leasing, manufacturing, and services throughout North America. It operates through two segments, according to its 10-K for 2023:  Railcar Leasing and Management Services Group: As the name suggests, it provides leasing and fleet management services. The latter is designed to optimize the ownership and usage of railcars. For the quarter that ended September 30, it contributed $289.5 million in revenues. Rail Products Group: This segment manufactures freight and tank railcars, as well as converting and upgrading cars as the market demands. It also offers a range of maintenance services. This segment provided $603.2 million in Q3-2024 revenue.  TRN railcars photo (Trinity website) At the close on November 18, its shares traded at $37.44, and it had a market cap of $3.06 billion. Competition and Competitive Advantages In the 10-K, Trinity reported it faced \"aggressive competition\" in its end markets. That competition takes on various forms, including product performance, technological innovation, quality, reliability of delivery, customer service, and more. Manufacturing and leasing competitors include The Greenbrier Companies (GBX) with a market cap of $2.04 billion, GATX Corporation (GATX) with a market cap of $5.39 billion, and Union Tank Car Company, which is a subsidiary of Berkshire Hathaway (BRK.A) (BRK.B). This is how Trinity's net income margin compares with those of GATX and GBX: TRN net income margins chart (Seeking Alpha) Trinity's margin was 12.46% at the end of Q4 2015, but then trended downward as the oil price slump reduced demand. For the past four quarters, though, the margin has nearly doubled, going from 2.68% in Q3-2023 to 5.31% in Q3-2024. The company does not appear to have much of a moat, if judged by pricing, but it is a large, well-established firm that has long-term relationships with customers. It also has an advantage through its ownership; 86.34% of its shares are owned by institutional investors, who typically provide patient capital. Q3 Earnings Trinity released its third-quarter earnings results on October 31. Its EPS of $0.43 beat estimates by $0.05 and revenue of $798.80 million was ahead of estimates by $102.80 million. Its results were summed up in this slide from its Q3 investor presentation: TRN Q3 earnings slide (Q3 investor presentation) On the earnings call, President and CEO Jean Savage told analysts an increase in carloads was driven primarily by agriculture and chemical end markets. In addition, a large corn and soybeans harvest is also expected to provide carload growth in the second half. But revenue was lower. CFO Eric Marchetto explained, \"External deliveries were slightly lower, both sequentially and year-over-year, but this was partially offset by favorable pricing and mix of maintenance work, improved lease rates, fleet growth, and a favorable mix of railcar deliveries.\" He also noted that Trinity has benefited from a better average cost of debt, its ability to generate \"significant\" cash flow, and to optimize its fleet because of a strong secondary market. Marchetto also pointed out that Trinity's initial guidance for the year put earnings at $1.30 to $1.50, and at the end of the third quarter it expects an increase of $0.35 at the midpoint. That represents a 25% increase, at the midpoint of $1.40. Trinity's Dividend The dividend yield, of 3.01% is significantly higher than the S&P 500 average yield. The annual payout is $1.12 and the payout ratio is 50.0%. It's also a growing dividend, with a five-year growth rate averaging 11.84%, and it has increased every year for the past 14 years. So far this year, it has returned $77 million to shareholders through dividends and share buybacks. Growth Prospects This 10-year chart shows how revenue, EBITDA, and net income fell in the first half of the past decade, then began a recovery as the pandemic eased: TRN revenue, EBITDA, net income chart (Seeking Alpha) First, the slump that began in the mid-2010s can be linked to the steep decline in oil prices that began in 2014 and bottomed out a few years later. Second, net income has been relatively weak when compared with revenue and EBITDA. The chart shows revenue and EBITDA making steady gains for several years now, while net income seems to have slowed. However, the two Wall Street analysts who cover Trinity expect strong growth over the final quarter of this year and then again in 2026: TRN EPS estimates table (Seeking Alpha) Valuation For shareholders, the past 12 months have been a bonanza, with the share price rising 49.40%. Over five years, it's still reasonable (78.06%) but not as robust as the past 12 months. And over the past decade, it's been poor, thanks to the oil price slump in the 2010s. This is a five-year chart: TRN 5-year price chart (Seeking Alpha) Despite the pricing strength in the past 12 months, this excerpt from the Seeking Alpha valuation chart shows a B grade, suggesting Trinity is likely valued fairly: TRN valuation table (Seeking Alpha) To try to establish a price target, I will first review the relationship between EPS and the share price over the past decade: TRN EPS & price chart (Seeking Alpha) The relationship is somewhat loose, but recently has been closer, so I will start with that method. As we saw above, analysts expect Trinity to top last year's EPS by 29.35% and then drop of -4.76% in 2025. Multiplying 29.35% by 25% (the remaining quarter in 2024) gives us 7.34%, and multiplying -4.76 by 75% (three quarters in 2025) equals minus 3.57%. Next, we will add 7.34% and -3.57 for a total of positive 3.77%. Adding 3.77% to the November 18 closing price gives us a one-year target price of $38.85. That is a small increase, but better than the analysts' target of $36.50, which is 2.51% lower than the current price. I consider my target more realistic, and even at that, $38.85 seems low. Why? Trinity's management posted good numbers in Q3 and expects more of the same in Q4. There were no concerns expressed in the earnings call about 2025 and 2026 revenue or earnings. By itself, an increase of 3.77% is not that attractive; however, I think the price will rise beyond that in the next year (by an unknown amount). In addition, there is the 3.01% dividend yield, which nearly doubles the anticipated increase, to 6.78%. Based on this information and the potential for big gains in 2026, I am rating Trinity a Buy. One other Seeking Alpha analyst has rated it in the past 90 days, and that is a Hold. The one Wall Street analyst who has a rating gives it a Hold, as well. As noted, the Quant system gives it a Strong Buy, Risk Factors My assumptions, and those of other analysts cited in this article, may prove to be wrong, and if they do the company may have significantly different results than those we expect. With competition in the industry described as \"aggressive\", Trinity may lose market share (as well as suffer financial losses) to other railcar manufacturers and lessors who develop new technologies. As its history with falling oil prices indicates, Trinity's end markets are cyclical or may fluctuate in unexpected ways. Because of that uncertainty, it may buy or sell its railcars at the wrong time. Most of its railcar manufacturing is done in Mexico, subjecting production and sales to risks that arise out of cross-border political issues. Currency exchange rates are also an uncertainty. Trinity is subject to rules and regulations from many different regulatory agencies, at home, in Mexico, and in Canada. That takes in many aspects of its business, from manufacturing to railway equipment rules. Conclusion I was interested to see the Quant system's Strong Buy rating, since its proprietary quantitative process offers them so infrequently. While I can only give it a Buy, I still see Trinity as a strong company, with more profitable growth years ahead. The company's performance has been much better over the past three years.  Adding in the dividend, I expect Trinity's share price to increase nearly 7.0% in the next year and have a Buy rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484697807"}