Turnaround Letter Buy-rated Trinity Industries (TRN) reported revenues of $814 million, in-line with consensus estimates. Earnings of $0.39/share were about 11% better than consensus estimates for $0.35/share, and ahead of $0.38/share last year when industry conditions were stronger.
Leasing revenues of $190 million were 8% above a year ago, and the leasing operating profit margin expanded to 42% from 39.6%. Railcar Products revenues of $723 million were 45% above a year-ago while profits more than doubled to $65.4 million. Additional profit growth came from railcar sales, which aren’t part of Trinity’s core earnings.
Overall conditions appear modestly weaker. The company narrowed its full-year earnings guidance to $1.17-$1.27/share. Lower guidance for leasing, railcar and other profits will likely be offset by lower corporate and interest expenses as well as slightly higher sales of railcars from its leased fleet. Trinity’s outlook for fourth quarter railcar orders was reduced by about 8.4% at the midpoint of its estimated range.
Trinity has slowed its railcar production, pushing some output into 2020 as it readies for slower industry volumes. We think this smoother taper makes sense. Their outlook for industry railcar orders in 2020 is now low-mid-40,000s. The company is well-versed in how to handle industry slow-downs of much greater magnitude, perhaps more-so than investors’ patience. Management suggested that Trinity’s earnings per share will be moderately lower in 2020 than in 2019, but free cash flow before fleet investments will be higher (due to lower working capital requirements).
Trinity repurchased 5.2 million shares, and partly funded this with additional non-recourse borrowing against its owned railcar fleet. The loan-to-value ratio on the fleet increased to 56%, approaching their 60-65% target.
The company had no news on retiring CEO Tim Wallace’s replacement other than they are looking at a wide range of internal and external candidates.
Trinity Industries Press Release: 3Q 2019 Earnings
We continue to rate shares of Trinity Industries a Buy with a $26 price target.
Disclosure Note: One or more employees of the Publisher own TRN shares.