After sinking deep into the red over the past year, Textainer Group Holdings (TGH) returned to profitability in the third quarter of 2017 thanks to a significant improvement in the container leasing market. That helped drive the stock up more than 200% this year.
Arguably, Textainer is in the early stages of its rebound. Not only does the company have additional upside within its legacy container fleet, but it recently bought $500 million of new containers, which should drive earnings higher in the coming quarters. Meanwhile, with plenty of dry powder, the company can continue buying containers. These three factors should drive up the company's profitability in 2018, which in turn could push the stock even higher.
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Just scratching the surface
Two factors drove Textainer's recent return to profitability. First, demand for containers has rebounded sharply, pushing rental rates to the highest level in many years. As a result, the company was able to secure lucrative contracts for containers that were either idly sitting in ports or just coming off lease. That helped drive a 3.1% improvement in lease rental income versus the second quarter. In addition, the company was able to sell older containers for much higher prices, which enabled it to book an $8 million gain last quarter, up 35.6% from the second quarter.
However, that's only the tip of the upside potential for the company's current container fleet. CEO Philip Brewer noted last quarter that "leases maturing in 2018 have average rates of $0.56 per CEU [container equivalent unit] per day," which is "well below current new and depot container rental rates." So, Brewer noted, "if current market conditions continue, as these leases reprice any increase in rental revenue will flow straight to our bottom line." Likewise, if current container prices hold up, the company could book significant gains next year by selling older containers.
The coming $500 million boost
Textainer invested $500 million through the third quarter on new containers, which at current lease rates will earn the company a lucrative mid-teen return. More than 70% of those containers will start heading out to customers by year-end; Brewer said that "the impact on our results is not yet apparent and will be seen in the coming quarters."
Textainer's peers have also been aggressively buying new containers to take advantage of the currently strong leasing market. Rival CAI International (CAI), for example, has spent $470 million so far this year on new containers, leasing virtually all of them to long-term contracts. Those new additions should drive CAI International's earnings upward in the coming quarters. Meanwhile, industry leader Triton International (TRTN) ordered $1.6 billion of new containers for 2017 and had another $100 million on order for delivery next year, which it expects will drive profit and cash flow growth over the next year.
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Deep pockets to continue buying
Textainer has the financial resources to keep buying more containers. CFO Hilliard Terry noted on the company's third-quarter conference call that it had close to $900 million of liquidity, so it was "well positioned to take advantage of growth opportunities throughout next year."
One other thing management noted on the call was that Textainer remains "underlevered relative to our peers." Because of that, the company doesn't need to issue equity and dilute investors to continue expanding its fleet. Contrast that with Triton International, which recently sold $192.9 million of stock to "support our aggressive container investments," according to CEO Brian Sondey. Because of Textainer's financial position, a large stock sale that could knock the wind out of its sails won't be necessary in 2018.
Expect profits to soar in 2018
With the embedded upside from its legacy fleet and a boatload of new containers on the way, investors should expect Textainer's profits and cash flow to head much higher in 2018. That improving profitability alone could continue driving the stock upward. Meanwhile, it's possible that the company could bring back its once-lucrative dividend next year, which could further boost returns for investors. While another triple-digit gain is unlikely, 2018 could still be an outstanding year for Textainer investors.
