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Hauling In Profits with This Shipper

June 17, 2013 | About:
Textainer (TGH) is the world’s largest lessor of intermodal containers with a total fleet of more than 1.3 million containers. They lease containers to more than 400 shipping lines and other lessees, including each of the world's top 20 container lines.

What else makes TGH enticing is its impressive 4.9% dividend yield, which is well-covered, being a 50% payout of earnings. TGH has seen its stock rallied nicely on the back of a rebounding economy and rising GDP.

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What's more is that the expected rebound in the economy should be big headwinds for the company. The U.S. BEA saw real GDP growth of 2.4% in first quarter 2013, sequentially. Real GDP growth was only 0.4% in fourth quarter 2012. The World Bank expects the world economy to grow 2.2% this year. What’s more is that the World Bank expects growth in high-income countries, such as the U.S., to grow by 2% and 2.3% in 2014 and 2015, respectively.

Financials

All the major shipping companies trade with similar profit margins and leverage, but TGH has a leading position when it comes to return on investment, being nearly double that of top competitor TAL:

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One of the big stories for TGH for the rest of 2013 and going into 2014, will be the purchase of leasebacks and managed containers. The company has been one of the leading purchases of containers over the last 10 years. The robust capital expenditure plan has driven free cash flow negative for a number of years.

In October 2012, TGH acquired some 81,000 twenty-foot equivalent units of dry freight containers from its managed fleet. Then in December 2012, the company acquired a 50.1% interest in TAP Funding, and in January 2013, acquired approximately 24,000 twenty-foot equivalent units of standard dry freight containers from its managed fleet.

However, worth noting is that despite the robust capex, TGH has been generating solid cash flow from operations, having grown CFO at an over 20% annualized rate over the last five years.

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Growth opportunities

TGH expects an uptick in container purchases to continue for the rest of the year, driven by higher credit availability in Asia. As well, TGH’s long-term lease structure is perfect for generating stable cash flows and high utilization -- with 80% of its fleet on long-term lease structure and utilization reamined above 95% in 1Q.

TGH has upped its dividend 13 consecutive quarters, and its portfolio of leases have an average remaining duration of 3.7 years, supporting its stable dividend.

Tank containers: TGH is also breaking into tank containers, which is a key growth opportunity. This includes an agreement with Trifleet Leasing, a lessor of tank containers. TGH will be able to leverage Trifleet’s experience and customer relationships.

This is a key growth market for what has been a fragmented industry. Tank containers service a number of segments, including food items, chemicals and gases. This tank segment also provides higher margins, including cash on cash returns of mid- to high-double digits, versus low double-digit returns in the dry market.

For the tank container market, their appears to be market share available for the taking. The top five lessors in the market have 60% of the market. Meanwhile, Trifleet and smaller operators have held only a small part of the market in recent years, leaving the likes of TGH with access to low costs of capital to enter the market.

Valuation

Let’s look at TGH from a normalized earnings power standpoint, which is the amount of money the company can throw off to shareholders without impairing the assets. Assuming sales of some $500 million, applying the long-term average earnings before taxes of 45% and we get normalized operating income of $225 million.

We then account for economic depreciation, not accounting deprecation, via maintenance capital expense and omitting growth capital expenditures. Assuming growth capital expenditures of 50% of total capex and then adding back 75% of growth capex. Lastly, we account for taxes by applying the long-term tax rate. Thus, adjusted earnings is $674 million. We then convert these earnings into earnings power value, by dividing by the cost of capital at 11.5%, and find enterprise value to be $5.87 billion. Netting out debt and cash, the intrinsic value is $63.45, presenting upside of 68.5%.

Investment summary

For those looking to invest in the shipping industry, and capitalize on the rebounding economy, TGH is a top bet. The company has been foraying into new growth markets that should help boost earnings higher and return it to positive free cash flow.

About the author:

mdhargrave
Investment adviser and startup striver.

Visit mdhargrave's Website


Rating: 4.5/5 (8 votes)

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