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This Is Why Textainer Group Holdings Limited’s Stock Crashed 22% in August

By Matthew DiLallo – Sep 6, 2016 at 1:00PM

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The container leasing company reported another weak quarter and cut its dividend again.

Image source: Getty Images.

What happened

August was an awful month for investors in Textainer Group Holdings Limited (TGH -0.10%), with the stock dropping 21.8%. Driving that decline was another weak quarter, the company's second dividend cut in a year, and growing concerns surrounding credit quality in the sector.

So what

Textainer Group Holdings' second-quarter report was just awful. Lease rental income slumped 6.3% year over year, while adjusted net income plunged an unnerving 92.4% to $3 million, or $0.05 per share. That said, the company did record $19.5 million of container impairments after writing down its inventory of containers that are for sale. Without that writedown, its adjusted earnings would have been $21.8 million, or $0.38 per share. Still, that's well below the year-ago period. 

Driving the decline in revenue and earnings is the sluggish global trade market, which is weighing on both container prices and container lease rates. While there were some positive signs in the market during the quarter, Textainer remains cautious. That is why it announced an 87.5% dividend reduction from its prior rate, which is in addition to the 48.9% cut it announced last November.

Slowing global trade is not only weighing on the container leasing sector -- it's also putting the shipping industry in some serious financial trouble. That was something rival Triton International Limited (TRTN 0.07%) noted in its earnings report. Brian Sondey, the CEO of Triton International, said:

Business conditions are also challenging for our shipping line customers, and several of our customers are in active financial restructuring negotiations. While our collections performance generally has been strong, credit risks will remain elevated until freight rates and the financial performance of the container shipping lines improve.

Those financial fears came to a head at the end of August when the world's seventh-largest shipper, Hanjin, collapsed and went into receivership. This is causing its ships to be denied entry to ports or seized upon entry. This puts container owners like Textainer Group Holdings and Triton International at risk of not getting paid on time or for the full amount of their leases to Hanjin.

Now what

The container shipping sector is currently going through some very rough seas, which pummeled Textainer Group Holdings' stock last month. Given the troubles of a key shipper, those concerns will not go away anytime soon. Instead, the sector could get much worse before eventually improving in the next wave of global trade growth.

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

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Stocks Mentioned

Textainer Group Stock Quote
Textainer Group
$30.49 (-0.10%) $0.03
Triton International Limited Stock Quote
Triton International Limited
$66.38 (0.07%) $0.05

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