A High-Yield Play on the Cargo Boom

03/16/2011 12:52 pm EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

A leading provider of freight containers is delivering a hefty yield as demand soars, writes J. Royden Ward, editor of Cabot Benjamin Graham Value Letter.

Containers are the largest and fastest growing segment in the world of freight transportation. Versatile containers are helping to interconnect trucking, railroads and ships, offering a very cost efficient way to transport cargo around the world.

Containerized cargo includes everything from auto parts, machinery, and manufacturing components, to shoes and toys, and frozen meat and seafood.

Someone brought a terrific company to my attention recently. It’s one of the biggest companies in the intermodal container business and is experiencing a huge increase in demand.

TAL International Group (TAL) is one of the world’s largest lessors of containers and chassis. The company buys intermodal containers that can be transported on ships, trucks, and railcars—enabling containers full of goods to travel great distances with a minimum of handling.

TAL’s operations include buying, leasing, and subsequently selling multiple types of intermodal containers. TAL is also involved in reselling containers to container traders and users, as well as financing port equipment, such as container cranes, reach stackers, and so on. The company owns 856,000 intermodal containers.

Full Speed Ahead for Trade
Demand for containers dwindled in 2009, but rebounded with a vengeance in 2010. TAL’s utilization rate reached a record 98.6% at the end of 2010, even though the company added 180,000 containers during the year.

Container purchases are primarily financed by the company’s bond offerings. TAL’s bonds are rated “A” by Standard & Poor’s, and carry an interest rate of 4.8%.

Strong demand is causing a global shortage for containers, which is driving leasing rates and resale prices significantly higher—all to the benefit of TAL. Part of the stronger demand can be attributed to reduced direct container purchases by TAL’s shipping customers, which are trying to avoid new capital expenditures.

TAL has ordered another 180,000 containers for delivery in 2011, many of which have already been committed to leases. As a result, the company expects profits to accelerate during the next several quarters.

Sales increased 7%, and earnings per share catapulted from $0.72 in 2009 to $2.32 in 2010.

My best guess is that sales will rise 18% in 2011, and earnings per share will increase 25%, to $2.90. Growth in 2012 will likely decelerate.

At 12.5 times my 2011 EPS estimate—and with a big dividend yield of 5%—TAL shares are very attractive, but speculative.

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