Tal International: a Leveraged Play on Global Economic Recovery Priced at a PE 10
TAL International Group (TAL) is one of the world's largest lessors of intermodal freight containers for the shipping business with 17 offices in 11 countries and approximately 230 third-party container depot facilities in 40 countries. TAL's fleet consists of approximately 1,238,000 containers and 2,031,000 twenty-foot equivalent units (TEU).
TAL’s second quarter earnings reported record pre-tax income, adjusted to exclude losses and profits on interest rate swaps, up 7.8% at $1.66. The results were boosted by the recovering world economy which led to very high utilization rates of 97.5% for the second quarter. The company also took advantage of the very low interest rate environment to refinance several debt facilities and extend and lower the fixed rates on a large portion of its interest rate swap portfolio.
Brian M. Sondey, President and CEO of TAL International, has said he expects the market to hold up and utilization levels to remain high in the second half of the year allowing leasing revenue to continue to grow. Used container sale prices are expected to continue to moderate and cause disposal gains to continue to trend down to historically normal levels. However the company will benefit from a full quarter impact of lower interest rates from the refinancing activity that occurred throughout the second quarter. Overall, pre-tax income is expected to hold steady or increase slightly from the second quarter of 2013 to the third.
Wall Street seems to be broadly in agreement with management’s outlook. Consensus earnings on Yahoo Finance are forecast to increase 10% p.a. over the next 5 years.
With net debt over €2.7 billion TAL is a highly leveraged and risky play on global economic recovery. But priced on its current PE multiple of 10, some investors may be tempted.
The author ABN is a blogger for SurgingEarnings.Com
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Disclosure: The author holds no positions in the above mentioned stocks