You Can’t ‘Contain’ This One

08/13/2008 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor, Trader’s Advantage, sees global growth boosting the fortunes of this company.

Ask economists what key catalyst set off the boom in world trade and they'll tell you it was the standardized intermodal shipping container.

The global demand for new containers has grown at a consistent rate of 10% a year. Leasing companies currently own about 40% of the world's 30 million TEUs (twenty foot equivalent units), the industry's standard measure of containers. CAI International’s (NYSE: CAP) market share among leasers has grown steadily with its expanding fleet, which included just over 770,000 TEUs of containers at the end of March, making it the seventh largest leaser in the industry with a 6.6% share of the market.

What really differentiates CAP from industry peers is the company's diversified business model. Though they're fundamentally interconnected, its operations are managed through two segments: container leasing and container management. New containers are purchased and leased to more than 200 shipping companies around the globe, and after the initial leases expire, CAP will sometimes sell the containers to third party investors and provide management services. Regardless of whether it keeps or sells its used containers, CAP continues to arrange the leasing contracts for both.

CAP locks in long-term contracts that usually last at least five years on 70% of its owned containers, and management contracts on sold containers usually last for 8 to 12 year periods. Container utilization rates were above 95% in March, and they've hovered above 90% consistently.

The big picture: CAP is growing fast, and world trade will drive demand for new containers without a doubt. Second quarter earnings increased 54% over last year, to $6.3 million, on revenues that jumped 47% to $20.6 million. The results were helped by the recent acquisition of Consent Equipment AB, a Swedish leaser of specialty containers that operates throughout Europe, but CAP is seeing strong growth across its core businesses.

Looking forward, CAP is planning to increase its fleet by 11% to 13% annually and have one million TEU's of capacity within the next two to three years. The company notes that a slowing US economy shouldn't hurt profits as the flow of goods between Asia and Europe will pick up any slack, and management's guidance has undershot analysts' estimates pretty consistently. Profits for 2008 are expected to be 75% higher than last year's, with the consensus estimate at $1.43 a share, and analysts are projecting the company to earn $1.70 a share in 2009. CAP currently trades at a price/earnings multiple of 13.5, which makes a price target of around $23 look pretty reasonable.

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