This Trend in Transportation Is Good News for Leasers

The slow but steady economic recovery in the U.S. can be witnessed in the transportation market. Stronger demand for railroad, truck, and maritime operators has enabled companies to realize increasing volume and higher pricing this last year, boosting their earnings. But many of these companies lease a big percentage of the equipment they use (railroad cars, containers, semis, etc.), opening business opportunities for other companies that rent it. Let's take a look at three different leasers that operate in transportation, one with major operations for trucks and vehicles, another with interests in railroads, and a third involved in leasing freight containers.

Good performance
First, here's one of the world's largest providers of integrated logistics and transportation solutions, Ryder System (NYSE: R  ) .

The company's third quarter was an improvement over last year. Operating revenue grew 5% and total revenue is up 4% on the back of solid commercial rental results and double-digit revenue growth from its supply chain solutions business. 

Ryder System still enjoys good organic growth levels. The company's fleet management solutions segment will experience improved offerings in contractual product lines with a newer lease fleet and various maintenance initiatives. Moreover, used vehicle sales will continue to increase, with stable pricing and solid inventories. Further, its recent €30 million multi-year contract with the German Ministry of Defense to supply vehicles should help maintain a healthy cash flow.

In March 2013, the company relaunched its dedicated contract carriage segment, which provides equipment, maintenance, and administrative services of a full lease with drivers and additional services. This complete service offering allows for higher use of the company's capacity and will help increase earnings looking ahead.

Railcars driving growth
Second, we have GATX (NYSE: GMT  ) , which leases, operates, and manages assets in rail, marine and industrial equipment markets. It controls one of the largest railcar fleets in the world, and the largest fleet of U.S. flagged self-unloading vessels on the great lakes.

The company's third-quarter net income was flat compared with the prior-year quarter. Nonetheless, it was benefited by the renewal rate change of GATX's lease price index to 34.3%.

Considering that GATX's rail segment accounts for 75% of revenue, the company should benefit from better perspectives within the railway industry in North America. In fact, its rail segment in the region reported a profit of $57.9 million for the quarter, up 27% year over year.

Overall, the company should profit from strong lease renewal activities and continued growth in lease rates looking forward. However, inconsistent demand for marine transport services and regulatory issues are a factor of concern.

Finally, we have TAL International Group (NYSE: TAL  ) , one of the world's oldest and largest lessors of intermodal freight containers, serving every major shipping line in the world.

TAL reported a good third quarter, with leasing revenues of $143.9 million, up 6.4% year over year, and a utilization rate of 97.3%.

With a purchase of $620 million in new and sale-leaseback containers, the company continues to expand its business even further. Plus, considering that over 75% of its containers on-hire are on multi-year long-term or finance leases, a good return is secured.

However, after a low single-digit trade growth in 2013, forecasts project global containerized trade to grow around 4% in 2014. Hence, the company should still profit, but it is hard to expect record growth.

Bottom line
Ryder System will continue to deliver good earnings and revenue growth. But its dedicated services business in particular should continue to expand, driven by secular outsourcing trends and sales initiatives.

Regarding GATX, railroads will continue showing good performance in North America throughout 2014, boosting the company's earnings.

TAL International continues to show high equipment utilization and strong operational and financial performance. The company should benefit even more in the event of higher trade growth in 2014.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2014, at 2:09 PM, blackbeardan wrote:

    TGH may be a good yield play, but I think competitor CAP has more catalysts.

    Shares of shipping container lessor CAI International (CAP) languished last year as larger rivals TGH (+29%) and TAL (+56) outperformed the overall market. But things may be getting ready to change.

    CAP is outright cheap according to any comparison with its container leasing peers. It trades at a price/earnings multiple of 7, and price/book of 1.19 versus 10.8 and 2 for TGH, 11 and 2.2 for TAL. CAP's five year CAGR is a robust 22 compared to 14 for TGH and 11 for TAL. So what gives?

    In addition to its smaller market capitalization, CAP has yet to initiate a dividend. Management has expressed frustration with the company's share price in the last two quarter's earnings calls and has discussed various methods to enhance shareholder value, including a share buyback or the initiation of a dividend. CAP is set to report earnings on February 10, and many are pressing management to clearly delineate its capital return strategy. If management doesn’t act, the company could become a target for activists.

    It should be noted that shares of TAL are up over 200% since initiating its dividend. TGH is up a whopping 520%. William Blair analyst Robert Napoli believes CAP could easily pay and sustain a $1 dividend, about a 30% payout ratio which would represent a 4.6% yield.

    Even without a capital return, shares are poised to improve as global trade resumes to normal levels. Historically the demand for containers has grown at an annual rate of 8% over the last 30 years. Most analysts believe container demand to grow 6% in 2014, up from 3% in 2013.

    FBR analyst John Mims calls the stock "an intriguing value play", and believes that a "sharp reduction (in 2013) in container manufacturing and investment will leave the industry under supplied in an improving demand environment in 2014, thus driving outsized demand for new leased containers."

    Last spring, the Ontario Teacher’s Pension Plan took competitor SeaCube private at a valuation ($467 million) equivalent to 11 times earnings. Triton Group, the largest US based container lessor was sold by the Pritzker family to private equity investors Vestar Capital Partners and Warburg Pincus at a similar multiple. HNA Group and Bravia Capital paid $1.05 billion for GE’s SeaCo LTD. SeaCo had a fleet of 870,000 TEUs, whereas CAP’s fleet is over 1 million. Judging by these transactions, shareholders of CAP could be well rewarded by a “going private” transaction.

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