Investors likely either love or hate Textainer Group Holdings (TGH) depending on how long they've held shares. Those who purchased the stock more recently are likely enamored with the container leasing company since it has rebounded nearly 125% since January. Meanwhile, those who've held for a longer period probably have the opposite feeling, since the stock is still down more than 50% over the past three years.
While I'm in that latter camp, I'm still fond of the company because I believe that there's more upside just over the horizon. That's because the container leasing market appears poised to rebound sharply over the next year, which could push Textainer Group Holdings up even higher, especially when factoring in its relatively low valuation.
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Hitting the inflection point
After steadily sinking for more than a year, Textainer's revenue finally started to rebound last quarter. Overall, lease rental income edged up 1.1% compared to the first three months while its adjusted net loss narrowed to just $1.2 million, or $0.02 per share. Several factors drove that improvement, including a rise in container prices as well as an increase in utilization.
Another evidence that things are starting to turn around for the company is that the capital market began to reopen so that it can access funding to refinance debt and make new container acquisitions. CEO Phillip Brewer noted this shift in last quarter's earnings release. He stated that "due to the need to recover Hanjin containers and financing limitations, our investment in new containers was extremely limited during the first quarter." However, he pointed out that the company raised $920 million in the second quarter to "pay down existing term debt and bank facilities, enabling us to free up liquidity and acquire new containers." As a result, it has invested $275 million in new containers under attractive terms with initial yields above 12%.
Meanwhile, the company's access to capital has continued to improve during the third quarter. Earlier this month, Textainer closed a refinancing that extended the term and lowered the rate of the $1.2 billion warehouse financing facility that it uses to acquire intermodal containers. CFO Hilliard Terry noted that this is an essential funding vehicle for the company and that the "refinanced terms improve our funding costs and provide capacity for increased fleet growth in a very strong market."
In addition to the incremental capital secured to acquire new containers, Textainer was recently selected to manage a newly acquired container fleet for a third party. That deal will bolster the revenue it collects from management fees.
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Getting ready to ride the next wave
This string of strategic initiatives helps put Textainer Group Holdings in the position to thrive as industry conditions continue to shift from a headwind to a tailwind. Rival CAI International (CAI) noted this turn when it reported results. CEO Victor Garcia stated in the second-quarter earnings release that while CAI "observed strong demand" for its equipment in the second quarter, he believes that "shipping lines have seen stronger demand so far in the current quarter." As a result, the CAI International CEO believes that "demand will continue to be strong through the remainder of the year." Meanwhile, fellow container leasing rival Triton International (TRTN) likewise noted that it expects market conditions to remain favorable due to a tight balance between supply and demand.
Textainer Group Holding also expects market conditions to continue improving. Because of that, Brewer stated that "we are excited about our outlook." He added:
Should current market conditions continue going forward, we project our revenue to increase significantly due to the repricing of maturing leases which are at rates well below the current market. We believe that these positive changes and trends, especially the future impact of lease repricing, may not be recognized by the market.
Meanwhile, another possible catalyst is that Textainer could soon reinstate its quarterly dividend. The company cut the payout twice as market conditions deteriorated before eliminating it last fall. That said, it emphasized it would review the decision to scrap the dividend as market conditions change, which they have. If it does bring back the payout, it will enable it to better compete for investors with Triton International, which has continued to return capital to shareholders throughout the market downturn.
This metric makes those catalysts look even better
While Textainer Group Holdings' stock has rebounded sharply over the past year, it has underperformed both CAI International and Triton International. Consequently, the company currently sells for 0.9 times its tangible book value while CAI trades at 1.2 times and Triton fetches 1.9 times. I love that discounted price because when it's combined with its other catalysts, it suggests that there's plenty of fuel left in Textainer's tank.
