Why Textainer Group Holdings's Earnings May Be Less Than Awesome

It takes money to make money. Most investors know that, but with business media so focused on the "how much," very few investors bother to ask, "How fast?"

When judging a company's prospects, how quickly it turns cash outflows into cash inflows can be just as important as how much profit it's booking in the accounting fantasy world we call "earnings." This is one of the first metrics I check when I'm hunting for the market's best stocks. Today, we'll see how it applies to Textainer Group Holdings (NYSE: TGH  ) .

Let's break this down
In this series, we measure how swiftly a company turns cash into goods or services and back into cash. We'll use a quick, relatively foolproof tool known as the cash conversion cycle, or CCC for short.

Why does the CCC matter? The less time it takes a firm to convert outgoing cash into incoming cash, the more powerful and flexible its profit engine is. The less money tied up in inventory and accounts receivable, the more available to grow the company, pay investors, or both.

To calculate the cash conversion cycle, add days inventory outstanding to days sales outstanding, then subtract days payable outstanding. Like golf, the lower your score here, the better. The CCC figure for Textainer Group Holdings for the trailing 12 months is 173.0.

For younger, fast-growth companies, the CCC can give you valuable insight into the sustainability of that growth. A company that's taking longer to make cash may need to tap financing to keep its momentum. For older, mature companies, the CCC can tell you how well the company is managed. Firms that begin to lose control of the CCC may be losing their clout with their suppliers (who might be demanding stricter payment terms) and customers (who might be demanding more generous terms). This can sometimes be an important signal of future distress -- one most investors are likely to miss.

In this series, I'm most interested in comparing a company's CCC to its prior performance. Here's where I believe all investors need to become trend-watchers. Sure, there may be legitimate reasons for an increase in the CCC, but all things being equal, I want to see this number stay steady or move downward over time.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of the seasonality in some businesses, the CCC for the TTM period may not be strictly comparable to the fiscal-year periods shown in the chart. Even the steadiest-looking businesses on an annual basis will experience some quarterly fluctuations in the CCC. To get an understanding of the usual ebb and flow at Textainer Group Holdings, consult the quarterly-period chart below.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

On a 12-month basis, the trend at Textainer Group Holdings looks less than great. At 173.0 days, it is 71.8 days worse than the five-year average of 101.2 days. The biggest contributor to that degradation was DIO, which worsened 55.0 days when compared to the five-year average.

Considering the numbers on a quarterly basis, the CCC trend at Textainer Group Holdings looks weak. At 209.9 days, it is 70.1 days worse than the average of the past eight quarters. Investors will want to keep an eye on this for the future to make sure it doesn't stray too far in the wrong direction. With both 12-month and quarterly CCC running worse than average, Textainer Group Holdings gets low marks in this cash-conversion checkup.

Though the CCC can take a little work to calculate, it's definitely worth watching every quarter. You'll be better informed about potential problems, and you'll improve your odds of finding underappreciated home run stocks.

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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Textainer Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On December 10, 2012, at 6:21 PM, shiftsuper wrote:

    Over the last few years more companies have began leasing containers. Textainer has invested heavily in purchasing and then contracting out these leased containers, Textainer made an especially large purchase this fall.

    I believe that new acquisition(most already on lease) will be accretive in their next Q report.

    Shippers are also travelling slower to save fuel, thus more containers are needed.

    TGH has raised it's dividend for 11 straight quarters. I believe they will make it twelve.

    I found your article interesting, but my opinion is that you are over thinking it. We will see.

  • Report this Comment On December 20, 2012, at 3:57 PM, LeKitKat wrote:

    please stop publishing these useless power point canned presentations. Without an actual brain behind the numbers, these are worthless and misleading

    TGH does not have inventory as such. The have a small segment that sells used containers--it's not an inventory based business. Why pick them to illustrate the poor CCC based on their declining inventor turns?

    Whenever I click on these looking for analysis for companies I am researching, I am always disappointed. Either put a brain in charge or pull the concept and give those of us who wander in here from Yahoo! a break. The clicks you get are almost always inadvertent I am sure gauging the lack of recs and comments I see.

  • Report this Comment On December 20, 2012, at 3:59 PM, buylowersellhigh wrote:

    Thank you LeKitKat. I agree wholeheartedly.

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