Trinity: Solid Exposure to the Energy Trend

05/19/2014 12:01 am EST


Jim Jubak

Founder and Editor,

The US energy boom is offering investors an ideal opportunity to profit in this sector, and MoneyShow's Jim Jubak believes now is the perfect time to buy.

I was hoping for a big boost to the railroad tank-car sector from new federal regulations that would require replacing much of the current tank-car fleet with newer tank cars that were less prone to catching on fire and exploding. But despite the derailment (and resulting spill and fire) in Lynchburg recently, of a train carrying oil from North Dakota’s Bakken shale region, the Department of Transportation “urged” shippers to stop using older tank cars but stopped short of issuing any new regulations or promising to toughen proposed regulations sent to the White House. Those rules are expected to be released for a 60-day comment period over the summer.

But as disturbing as the continued foot-dragging at the agency is—the department has been working on new regulations for years, and last year, 154 tank cars failed in 116 incidents involving trains carrying crude—it does give investors a bit more time to buy into continuing growth (in tank car orders in particular and rail car orders in general) before new regulations go into force at the end of 2014 or in early 2015.

On Monday, May 12, I added shares of Trinity Industries (TRN) to my Jubak’s Picks Portfolio with a pre-split target price of $96 share. (On May 5, the company announced a 2-1 stock split effective June 19.)

Trinity got about 53% of its revenue in 2013 from making railcars. (The company manufactures a wide variety of railcars, not just tank cars.) That’s up from 40% of revenue in 2012. Add in another 12% of revenue from leasing railcars and you’re looking at a company with solid exposure to the trend. Trinity estimates that it accounts for about 47% of industry production of rail cars.

And what is the trend? 98,000 of the tank cars in service carrying crude are DOT-111 models, a design that dates back to the 1960s and that has been flagged as having a high rate of failure in accidents. The majority of the DOT-111 tank cars now in service were built before 2011; cars built before that date are hard to retrofit with current safety measures. (Regulators in Canada recently mandated the use of the newest model of tank cars within three years.)

Railcar revenue at Trinity grew by 42% in 2013 after growing by 58% in 2012. The company’s order backlog increased to $5.2 billion at the end of the March 2014 quarter, up from $5 billion at the end of 2013 and $3.7 billion at the end of 2012.

For the first quarter of 2014, Trinity announced quarterly earnings of $2.85 a share and record quarterly revenue of $1.5 billion. The company also raised guidance for the full 2014 year to earnings of $7.00 to $7.50 a share from its previous guidance of $6.30 to $7.00 a share. (The company also announced a 33% increase in its quarterly dividend to a post split annualized rate of 40 cents a share.)

The company carried debt of $2.94 billion at the end of the March 2014 quarter. That’s a slight decrease from the $2.99 billion in debt at the end of 2013. (That was down from $3.1 billion at the end of 2012.) Net cash and cash equivalents came to $788 million at the end of March.

Trinity is definitely an industrial cyclical with revenue and earnings tied not just to the US oil boom but also to the growth rate for the US economy as a whole. That means the PE on the stock has fluctuated widely with projections for US economic growth. The five-year PE has ranged from 2.6 to 31.9 and currently sits at 13.6 times trailing 12-month earnings per share and 10.6 times projected consensus earnings per share for 2014. My target of $96 works out to 13.15 times my projected 2014 earnings of $7.30 a share.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When, in 2010, I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Trinity Industries as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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