Trinity: Challenging 3Q21, Improving Railcar Market Outlook (Updated, Cowen)

Written by Marybeth Luczak, Executive Editor
“While market activity continues to improve, Trinity's third-quarter results were negatively impacted by labor shortages and turnover as well as supply chain disruptions, diluting the impact of margin improvement initiatives in the Rail Products Group,” President and CEO Jean Savage said during a Oct. 21 earnings announcement.

“While market activity continues to improve, Trinity's third-quarter results were negatively impacted by labor shortages and turnover as well as supply chain disruptions, diluting the impact of margin improvement initiatives in the Rail Products Group,” President and CEO Jean Savage said during a Oct. 21 earnings announcement.

While Trinity Industries’ Rail Products Group was “challenged” in third-quarter 2021, the Railcar Leasing and Management Service Group had “another quarter of strong performance, and we maintain our view that market fundamentals for railcar leasing should continue to ramp up into 2022,” President and CEO Jean Savage said on Oct. 21.

Trinity reported total company revenues of $503.5 million in the three months ended Sept. 30, 2021, up 9.60% from prior-year period’s $459.4 million. It attributed this to “increased demand and higher pricing in our highway products business and higher external deliveries in the Rail Products Group.” Company operating profit came in at $92.2 million compared with $72.9 million in third-quarter 2020, a 26.47% increase. This reflects a “higher volume of railcar sales from our lease portfolio, partially offset by higher costs associated with external deliveries in the Rail Products Group, and lower lease rates and higher depreciation expense in the Leasing Group,” according to Trinity.

For the Rail Products Group, revenues were $339.9 million in third-quarter 2021, a decline of 10.83% from $381.2 million in 2020. The company said this was a result of “lower deliveries and a shift in the mix of railcar products and services sold.” In the three months ended Sept. 30, 2021, the Group delivered 2,410 railcars; received orders for 2,530 railcars, valued at $218.6 million; and had a backlog value of $1.228 billion. This compares with third-quarter 2020’s 2,605 railcars delivered; 2,000 railcars ordered, valued at $186.8 million; and a backlog value of $1.155 billion. Trinity attributed the order value in third-quarter 2021 to a “higher number of units and differences in product mix.”

“While market activity continues to improve, Trinity’s third-quarter results were negatively impacted by labor shortages and turnover as well as supply chain disruptions, diluting the impact of margin improvement initiatives in the Rail Products Group,” Savage said. “It is important to note that while this quarter was challenged, we continue to expect improving demand for railcars and profitability.”

For the Railcar Leasing and Management Services Group, revenues were $185.5 million, up 0.87% from third-quarter 2020’s $183.9 million. Fleet utilization came in at 95.0% in third-quarter 2021 vs. 94.8% in the same period last year.

The Group’s “Future Lease Rate Differential climbed again in the third quarter to 1.4%, compared with –2.5% and –14.8% in the past two quarters,” Savage noted.

Among Trinity’s other financial and operational highlights for third-quarter 2021:
• Income from continuing operations per common diluted share (EPS) of $0.33 and adjusted EPS of $0.29.
• Completed initial railcar portfolio sale of $325 million to Signal Rail Holdings LLC, a new railcar investment vehicle (RIV) partner.
• Year-to-date cash flow from operations and total free cash flow after dividends and investments came in at $428 million and $516 million, respectively.
• Repurchases of approximately 2.8 million shares at a cost of $77 million.
• Committed liquidity of $1.1 billion as of Sept. 30, 2021

Management Insight

“Trinity continues to execute well on our strategy to enhance returns and shareholder value,” Savage said. “The company continued to advance toward our initiatives to improve returns, highlighted by the $325 million portfolio sale in our latest RIV partnership. The Signal Rail portfolio sale this past quarter and its resulting benefit to our earnings and balance sheet are a prime example of this dynamic.”

She noted that “[i]t has been nearly a year since we introduced our strategic vision, and I am pleased with the progress we have made. We are continuing to execute on our goals, and despite a challenging quarter in Rail Products, the Company’s enthusiasm to achieve the goals we set out in last year’s Investor Day presentation has never been stronger.”

More details can be found through Trinity Industries Investor Relations.

Cowen Insight: ‘Raising Estimates and Target’

Cowen and Company Freight Transportation Equipment Analyst Matt Elkott 

“Unless rail traffic falls short of our mid-single-digit growth expectation for 2022, railcar production will have to increase materially, and we are modeling for 36% higher industry deliveries next year,” Cowen and Company Freight Transportation Equipment Analyst Matt Elkott reported on Oct. 25. “What’s more, given our forecast for significant order increases this and next year, the production growth—contrary to some expectations—could continue in 2023.”

Two Key Cowen Takeaways:

1. “The TRN [Trinity] stock swings following earnings (up on the results, down 2.5% on the day, then up 3% the following day) may be indicative of investors trying to make sense of the many moving parts at play for the company and industry. But the story is simpler than it may appear:

• “Railcar demand is strong and growing, driven by freight demand strength and network congestion. This was clearly reflected in TRN’s leasing results. It was not reflected in manufacturing because of high steel prices and supply chain disruptions. This will likely mean a solid manufacturing up-cycle in 2022, potentially even enduring in 2023, something that does not appear to be a consensus opinion. The primary risk to our view is if supply chain disruptions begin to destroy freight demand, or if it is negatively affected by any other factors.

• “High steel prices and supply chain disruptions have placed a 15%-30% premium on the price of railcars, causing production to fall short of what is warranted by underlying demand. This needs to be made up if traffic continues to grow (we’re expecting mid-single-digit traffic growth next year).

• “2020 and 2021 are below-replacement production years (32K units last year; we’re projecting approximately 31K units this year; industry replacement is 40-45K units).

• “The freight recovery and the approximate tripling of steel prices from pre-pandemic levels have reduced the industry’s idle car percentage from approximately 32% in July 2020 to just above 20% today. Said another way, the industry fleet utilization is nearly 80%; and we would view full utilization as 85%-90%.

• “We are now modeling for industry orders to increase 120% and 28% in 2021 and 2022, respectively. We expect deliveries to decline 4% this year (following a 45% decline in 2020) and to increase 36% in 2022. Again, while we do not have 2023 estimates, given our forecast for significant order increases this and next year, the production growth, contrary to some expectations, could continue in 2023.

2. “We are raising our 2021 and 2022 TRN EPS estimates to $0.66 and $1.43, from $0.60 and $1.38, respectively. This is to reflect the significant third quarter beat (driven in large part by asset sales) and pent-up production needs next year. Our price target rises to $36, from $34.”

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