Sell Trinity: The Company Doesn't Seem to Understand That It Sells 'Safety' and Not Just Railcars

11/14/2014 5:21 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The fact that this company's highway guardrail unit has 14 lawsuits pending against it isn't the reason MoneyShow's Jim Jubak is selling his shares as of today, November 14, it's the manufacturer's inability/unwillingness to address the issue of safety.

I still like the sector: The order backlog for freight and tank cars hit an all time high after railcar manufacturers took in 42,900 orders last quarter. Thank the energy boom and a bumper grain crop for that.

But I think I need a new dog in the hunt. Trinity Industries (TRN) faces an overhang of lawsuits against its unit that makes guardrails for highways. Granted that the highway construction unit accounts for only 10% of sales, I still think the 14 lawsuits pending on charges that Trinity made and then kept quiet about changes to its impact-absorbing guardrail head, adds an element of risk to the stock that you don't need. Especially when there are other alternatives in the sector.

As of today, Friday, November 14, I'll be selling Trinity Industries out of my Jubak's Picks portfolio with a loss of 12.2% since I added it to the portfolio on May 12.

The legal situation is somewhat murky. On October 20, a jury in Marshall, Texas, found Trinity guilty of violating the False Claims Act and of costing the US government $175 million in damages. The law provides for an automatic tripling of damages, so we're talking about $525 million. Potentially.

It gets a bit more complicated because the court action was initiated under Federal whistleblower rules by Joshua Harman, a Trinity competitor, who had discovered, he told the court, that Trinity had made changes to the impact-absorbing head of its guardrails in 2005, but did not tell the Federal Highway Administration of the changes for seven years. The federal agency, it came out in court, knew about the changes in 2012, but did nothing about them for the next two years.

The case was ordered to mediation at the end of October and Trinity will certainly appeal if mediation fails.

But what concerns me most about this, as an owner of Trinity shares, is the company's inability/unwillingness to get ahead of the issue. One of the big drivers of new orders for railroad tank cars is the need to upgrade the safety of those cars after a series of horrible accidents involving trains carrying oil from US and Canadian shale fields. In that environment, Trinity should recognize that what it's selling is 'safety' rather than tank cars. I'd certainly worry that some potential customers will decide that they'd rather buy their 'safety' somewhere else.  (I've got another set of concerns as someone who drives the highways and who thinks that government safety regulators might at least be awake.)

Neither the Federal Highway Administration, nor Trinity, has covered themselves with glory in response to the suits. A new testing regime, proposed by Trinity, and accepted by the agency, rests on standards dating back to 2005 that some critics, including Connecticut Democratic Senator Richard Blumenthal, think are way too lax. The tests, critics argue, should be conducted under tougher standards adopted in 2011. Both Trinity and regulators have argued that since the guardrails were first approved in 2005, they should now be tested using 2005 standards. The argument that the 2005 standards are 'good enough' seems strange coming from a company that is looking to sell tank cars under upgraded safety rules due from Canadian and US regulators. (The original tests of the guardrail units, the ET-Plus, were conducted by the Texas A&M Transportation Institute, which owns the patent to the ET-Plus and licensed it to Trinity. The new tests will be conducted by the Southwest Research Institute in San Antonio.)

The arguments from Trinity and regulators that the testing standards are appropriate may narrowly be true, but they don't seem like an adequate response to a problem that has caused-the lawsuits against Trinity allege-needless deaths in highway accidents. More than 30 states have now banned the product, despite continued approval of the product for use by the Highway Administration. There are an estimated 200,000 of the units in use on US highways.

In my opinion, Trinity isn't acting aggressively enough to reassure drivers, customers, or investors that it cares about safety. And absent that kind of response from the company, I'd prefer to look elsewhere for my exposure to the boom in the railcar sector.

I'll be adding a replacement for Trinity Industries to the portfolio on Monday.

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