Textainer Group Holdings Is Ready to Build Your Income

Textainer Group Holdings  (NYSE: TGH  ) is a manager, lessor, and reseller of intermodal freight containers. Within the container freight industry, Textainer is regarded by most as a best-of-breed company. That's because it has the highest net margins and highest return on equity in the industry over the past five years. 

Recently, Textainer has been spending substantial capital to expand its fleet of containers. While Textainer has been growing revenue at an impressive clip for exactly this reason, the container freight industry has been suffering from a surge in supply. As a result, for the first time in five years, both container lease rates and utilization rates are expected to drop in 2013.

Perhaps as a result of oversupply concerns, shares of Textainer and that of similar companies have suffered some substantial drops. Right now, Textainer is down by over 10% since late December, and the stock now yields an impressive 5.17% dividend yield.

Source: Textainer 8/21/13 corporate presentation.

Textainer has hitched itself to a fairly powerful secular trend. This chart sums up Textainer's growth story. Containerized port throughput is levered to the global economy and grows by between one-and-a-half and two times global GDP growth. As long as the global economy keeps growing by at least 3%, containerized throughput should increase by at least mid-single digits.

Best of breed
Before looking into the oversupply concerns, which are facing the containerized freight industry, let's first compare Textainer to its closest competitor in both size and profitability metrics, TAL International  (NYSE: TAL  ) . This year Textainer's net margin is  38.14% compared with TAL's 23%. Textainer has bested TAL and other major competitors, in each of the last five years.

Looking at return on equity, Textainer is often, but not always the highest among its peers. So far in 2013, TAL's return on equity sits at 23%, edging out Textainer at 19.34%. Textainer has been growing steadily over the last five years, with a compounded revenue growth rate of 17% and an EBITDA growth rate of 24%.

Oversupply concerns
Anecdotally, management has mentioned that whenever the company makes a bid to purchase new containers, there are now five or six companies offering up competing bids. Shippers are so confident that they can get containers in short order that these companies are no longer holding any inventory. Management believes this changed supply dynamic comes from Asian shipping companies flush with cash from cheap loans, whom are then able to purchase new containers despite the low "yield" on revenue. As a result, Textainer must either accept a lower cash yield on its newly purchased containers or purchase less containers altogether.  

For the first time in at least a few years, rental rates will have dropped in 2013. Since 2011, Textainer's fleet utilization has dropped from 98% to just 95%. All this has ended Textainer's growth streak: In 2013, Textainer expects its earnings per share to decline.

Still a positive picture
So it looks like the containerized freight industry is entering a different dynamic than what it has been used to for the past four years. This does not, however, mean that Textainer's growth story is over. Global GDP is forecasted to grow by 3% in 2013 and perhaps a little more in 2014, and GDP growth will continue to spur disproportionate growth in global trade and port throughputs.

Source: YCharts.

Valuation is what makes Textainer a compelling choice right now. Like many other dividend stocks, Textainer trades tightly with its dividend yield, with the income often providing a floor of support. The dividend is only 42% of earnings. The fact that the company is not able to pay for the dividend from free cash flow is entirely due to the fact that Textainer has been spending large amounts of capital to expand its fleet and grow earnings. At 10.7 times trailing earnings (and 10.43 times trailing EV/EBITDA ratio, confirming the company isn't "shielding" earnings with depreciation) Textainer is fairly inexpensive.

In fact, right now, I think that Textainer is a solid company to consider buying.  While there are definitely some headwinds for the short to medium term, the long-term story is still intact. This makes the dip in Textainer stock an opportunity to build income for those whom have a long-term horizon.

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  • Report this Comment On January 30, 2014, at 1:13 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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