Container Ship Storm

Image source: Getty Images.

Turbulent global economic conditions caused global trade growth to slow to a crawl over the past year. This is having a deep impact on the shipping industry and sapping demand for shipping containers. Making matter worse, weak steel pricing is adding even more weight to drag down the value of containers. These headwinds have combined to sink Textainer Group Holdings' (NYSE:TGH) financial results over the past year, driving its stock down more than 40%. Given this backdrop, investors are hoping for any signs of improvement when the company reports its second-quarter results on Tuesday morning.

First, let's review

Challenging industry conditions drove Textainer's first-quarter revenue down by 7.4% over the prior year, with income from three of its four sources slumping:

Sources of Revenue

Q1 2016 Actuals

Q1 2015 Actuals

Growth (YOY)

Lease rental income

$122.1 million

$129.2 million

-5.6%

Management fees

$3.3 million

$4.0 million

-16.8%

Trading container sales proceeds

$1.9 million

$4.8 million

-60.6%

Gains on sale of containers, net

$1.6 million

$1.1 million

53.8%

Data source: Textainer Group Holdings Limited. YOY = year over year.

Lease rental income dropped because of several factors. Fleet utilization is down 0.5% since the beginning of the year as a result of weak container demand. Moreover, with 8.5% of the company's container leases set to expire this year, the overall tepid demand for shipping containers is muting lease prices for contract renewals. Finally, the company's fleet shrank by 2.4% because of the active management of its fleet. That active management, along with container pricing, drove the changes in trading container sales proceeds and the net gains on the sale of containers.

Did the global trade bright spots shine brighter?

While industry conditions were rough in the first quarter, Textainer CEO Phillip Brewer noted that the company was "starting to see some bright spots." In particular, he said global trade is projected to grow by 1.5% to 2.5% this year, which is an improvement from the less than 1% that trade increased last year. In fact, he noted that the company saw a noticeable jump in demand for containers in April.

Given that outlook, investors should look to see if trade growth is accelerating as projected. Evidence of this would be the stabilization of utilization. That metric stood at 97.6% in last year's first quarter. However, it was down to just 94.1% by early May and would have been worse if it weren't for the 2.4% decrease in the size of the company's fleet over the past year. Utilization of at least 94% would imply that conditions have stabilized in the sector.

Did rising steel prices have an impact?

Another bright spot Brewer noted was that steel prices had rebounded, which resulted in a more than $150 increase in the price of new containers early in the second quarter. This had him growing optimistic that container prices would continue to float higher.

There's a reason to be optimistic after most major steel producers reported stronger-than-expected second-quarter results thanks to higher steel prices. AK Steel (NYSE:AKS), for example, noted that its average selling price rose by 2.8% over last year's second quarter. Meanwhile, Nucor (NYSE:NUE) noted a 9% increase in its average selling price per ton over just last quarter, while U.S. Steel (NYSE:X), likewise, noted that higher steel prices boosted its profitability.

Ideally, for Textainer, higher steel prices will have carried over into a further improvement of container prices. An increase in revenue from trading container sales proceeds and net gains on the sale of containers would be evidence of this.

Investor takeaway

After a tough 2015 and a rough start to 2016, Textainer investors are hoping for any signs of an improvement in the company's second-quarter results. For that to happen, the bright spots it detected at the end of the first quarter needed to not only have carried through the second quarter, but now be projected to drive improved performance through the balance of the year. This outcome would help stabilize the company's financial results going forward and put investors' minds at ease. 

Matt DiLallo owns shares of Textainer Group. The Motley Fool recommends Nucor and 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.