What happened
Shares of Textainer Group Holdings Limited (TGH) plunged last month, losing roughly a third of their value after the company reported fourth-quarter results. It wasn't the only container-leasing company to dive as rivals Triton International (TRTN) and CAI International (CAI) dropped 22.3% and 27.7%, respectively, last month on the same concerns after posting their year-end numbers.
So what
On the one hand, Textainer Group Holdings reported solid fourth-quarter results. The company earned an adjusted $0.26 per share, which was $0.07 per share ahead of analysts' expectations and a vast improvement from its year-ago loss. CAI International and Triton International also posted expectation-beating results, with both container-shipping companies earning $0.05 per share more than what analysts anticipated. Driving the strong performance from this trio of container companies was the continued improvement in the container-leasing market, which drove up lease rates and fleet utilization.
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Textainer said that it expected its financial results to improve throughout this year. CEO Philip Brewer stated that "we enter 2018 with great momentum and the support of a favorable market environment." Because of that, he expects the company's "performance in the first quarter of 2018 to be better than the fourth quarter of 2017, with increasing profitability as we move into 2018." Triton International's CEO Brian Sondey echoed those sentiments, expecting that "market conditions will remain favorable in 2018." In fact, Triton's CEO said:
The first quarter is usually our weakest quarter of the year ... [and] we usually experience a sequential decrease in profitability from the fourth to the first quarter. However ... we expect our Adjusted pre-tax income will increase slightly from the fourth quarter of 2017 to the first quarter of 2018.
Furthermore, he thought that earnings would "increase sequentially throughout the year if market conditions remain favorable." CAI International, likewise, expects "2018 to be a very strong demand year for containers as the world economy continues to expand and lessors continue to operate with high utilization," according to CEO Victor Garcia.
But while these companies expect earnings to improve this year, they tempered that bullishness by noting some headwinds on the horizon. CAI International's CEO, for example, pointed out:
Offsetting the impact of strong demand in the coming year is the expectation of increased competition from container equipment lessors who are active in the market, lower expected gain on sale of equipment due to a lack of equipment availability, and higher expected interest costs.
Textainer's CEO, likewise, cautioned that earnings on new leases would be "slightly moderated as competition increases" due to the improving market conditions.
Now what
Investors seem overly concerned about the impact that rising competition and other factors will have on the container-leasing sector this year. The industry is coming out of a brutal downturn, which is leading companies to invest heavily in bolstering their fleets, so they can profit as conditions keep improving. That should enable these companies to report rising earnings this year, which could help move their stocks higher. That's why last month's sell-off looks like it could be a good buying opportunity, with Textainer, in particular, looking compelling.
