A Street (Rail) Car Named Desire (Trinity Industries)

Some of the most ‘un-sexy’ and ‘boring’ industries / companies can actually be good for your portfolio. I came across Trinity Industries (NYSE: TRN) while I was looking into the railroad industry. Trinity is a large diversified industrial manufacturer that is probably best known for its railcar manufacturing and leasing business, but is also involved in the energy, construction, and marine sectors. Let’s take a look at their financials over the past five years shall we?

TRNAnalysis.au 10272015

Trinity’s previous five years of results were definitely a mixed bag as can be seen from the greater instances of RED and YELLOW as opposed to the preferred GREEN. A closer look at the KPIs presented above provides a clearer picture with which to make a more informed investment decision:

  1. Top-line growth…organic or bought?

While Trinity does occupy market leader positions in its several industries in which it operates, the Company has been active in the M&A space in the period under review. With the exception of the acquisition of Meyer Steel Structures in 2014, top-line and profit benefits from M&A have been modest and majority of growth has been organic. I consider this a good sign.

2. 2009…annus horribilis.

2009 saw a large goodwill impairment charge of $325M relating to its Rail business. While significant, it is non-cash and comes with the territory. Several 5-year CAGR values above were impacted by this write-down and are shown as NM. However, removing 2009 from the trend analysis shows good YOY growth across Net Income, EPS – continuing ops, ROE and ROA.

3. Old…but still growing.

Trinity was incorporated in 1933 and became a Delaware corporation in 1987. Despite being more than ’50 years old’, the Company is still growing and as such so is its debt.Total recourse and non-recourse debt increased by an average of 14% YOY over the past five years, but the firm’s coverage ratio increased by an even larger amount which makes me comfortable with this otherwise negative trend. The majority of the debt is non-recourse to Trinity and relates to its successful railcar leasing business…another factor which I view favorably.

4. Strong order book bodes well for the future of the Company.

Some of the Company’s favorable qualitative factors include:

  1. Diversification of product within diversified industries.
  2. Integrated business model (e.g. manufacture and sale of railcars, manufacture and lease of railcars (to own leasing business and third party lessors).
  3. Attractive long-term growth prospects for industries served. Massive investment in highway / road infrastructure is required over many years; continuous update and upgrade of railcar stock to meet new safety guidelines and counter general wear and tear; continuous investment in energy infrastructure (e.g. nat gas and wind power).
  4. Simple business model, but not easily duplicated (fairly decent “moat”). Company has a long history of producing high quality products used in sensitive applications…switching between providers is possible but I don’t see this as being significant.
  5. Successful Company leadership / management.

Trinity is currently trading at about 5.5 times TTM earnings and a dividend yield of 1.6% (as at 12/31/2014 Trinity had paid 203 consecutive quarterly dividends). It would appear to me the relatively low valuation afforded the stock is a reflection of its sensitivity to economic activity (industrial products) and interest rates (specifically its leasing activities).  However, I take an extremely long view of any business I analyse and believe Trinity Industries would make an excellent long-term investment.

What do you think of Trinity Industries?


3 thoughts on “A Street (Rail) Car Named Desire (Trinity Industries)

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