Railcar maker Trinity Industries (TRN) isn’t a favored name on Wall Street, but it’s allure these days among the fast-moving railroad stocks is that it, in fact, has lagged the group in the past 12 months. It’s one of the few rail-related stocks that have yet to join the railroad rally.Up as high as $50 a share last year, the stock has tumbled to a 52-week low of $24.41, in part because of the drop in the price of oil which has threatened to slow demand for railcars. And, a recent lawsuit against the company related to Trinity’s guardrail unit has spooked some investors. The stock closed at $31.42 a share on May 22, 2015.
“In our view, Trinity’s current stock price represents a favorable entry point for investors,” says Ian Gendler, executive director of Value Line Research, who believes that railroad stocks “still has plenty of room to run.”
Value Line ranks Trinity as No. 1 in timeliness, notes Gendler, and the industry is also ranked No. 1 out of 96. One big positive is the railcar manufacturer’s backlog is massive, he says, “encompassing 57,000 cars valued at $6.81 billion.”
And what’s more, “we expect demand to remain strong over the near term, which should lead to healthy profits,” says Gendler.
Trinity, whose products and services are dedicated to the U.S. market, is also an infrastructure play, says investment manager Stephen Leeb, president of Leeb Asset Management. Trinity has one of the most diversified infrastructure product lines of any company, big or small, notes Leeb, who is also editor of the investment newsletter "The Complete Investor."
While the company’s major business is the manufacture and leasing of railcars, Trinity is also a leading provider of construction materials, such as cement, concrete and sand. It also manufactures barges and provides highway products and wind towers.
“In other words, this is a company strongly leveraged to gains in U.S. infrastructure spending of almost any kind,” says Leeb. A possible downside for growth investors, says Leeb, is that Trinity tends to be highly cyclical.
“But it’s compelling value credentials, including a projected free cash-flow yield of nearly 10%, a single-digit current price-earnings, and a relatively low price-to- book value, “make it a terrific bet on increased infrastructure spending in the U.S.,” says Leeb.
Over the next 12 months or so, the stock could easily test or exceed its previous high of $50 a share, asserts Leeb. “And beyond 2016-2017, if America really gets serious about what it needs to, Trinity could emerge as a major market leader,” he argues.
The American Society of Civil Engineers estimates the U.S. needs to spend more than $3 trillion in the next few years to get our infrastructure to a reasonably acceptable level, Leeb points out. The need for infrastructure, which has the potential of generating a lot of growth and jobs, “is one of the few things that both Republicans and Democrats actually agree on, making it a decent bet that Congress, whether during this administration or next, will ultimately pass a major infrastructure-spending bill,” says Leeb. Trinity’s management has raised its earnings guidance for 2015 to $4.10-$4.45 a share from $4-$4.40, notes Michael Collins, analyst at Value Line. The company’s rail group deliveries are expected to be in the 33,000-34,500 unit range, up from the initial forecast of 32,000-34,000 cars, he notes.
“All told, we are lifting our bottom line target by 10 cents a share to $4.45,” says Collins. However, he has reduced his 2016 profit estimate by 10 cents a share, to $4.45 to reflect a slowdown in demand for energy-related cars. The company posted earnings of $4.20 a share in 2014.
Jim Corridore, analyst at S&P Capital IQ, says that after a 41% rise in revenues in 2014, sales could advance 13% this year. “Our forecast reflects improvement in Trinity’s railcar and construction segments amid a cyclical economic recovery.”
The company ended 2014 with a record-breaking backlog of $7.2 billion in railcar orders, which should keep production levels high, says Corridore. Revenues should also be supported by the sale of railcars to Trinity’s railcar leasing subsidiaries, although not at levels experienced in 2014.
Corridore, who rates the stock as a hold due in part to the recent sharp drop in the price of oil, expects Trinity to post earnings of $4.49 a share in 2015. He has a price target of $35 a share for the stock.
