Market conditions in the shipping industry have improved dramatically over the past year thanks to rising global trade. Those more-favorable market conditions have benefited Textainer Group Holdings Ltd. (NYSE:TGH), which has been able to capture higher lease rates as contracts on legacy containers expire. It has also been helped by strong pricing on new additions to its fleet. The company expects that these trends will continue as long as the escalating trade war between the U.S. and China doesn't slow down global trade.

A look at the numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$140.7 million

$119.2 million

18%

Adjusted net income

$17.7 million

($1.2 million)

N/M

Adjusted EPS

$0.31

($0.02)

N/M

Data source: Textainer Group Holdings Ltd.

Textainer reported strong results for the second quarter as revenue and earnings were up sharply versus last year's second quarter and the first quarter. Driving this improvement was across-the-board revenue growth:

Sources of revenue

Q1 2018

Q1 2017

Year-Over-Year Change

Lease rental income

$121.6 million

$108.8 million

11.8%

Management fees

$4.6 million

$3.5 million

29%

Trading-container sales proceeds

$3.2 million

$1.1 million

200.1%

Gains on sale of containers, net

$11.4 million

$5.9 million

93.9%

Data source: Textainer Group Holdings Ltd.

Lease rental income rose for the sixth straight quarter. Driving the growth was an improvement in container rental rates, which remain above the average lease rate of its fleet. That has enabled the company to capture higher pricing as legacy contracts expire, and on new containers that it has acquired since the start of the year.

Meanwhile, the price of used containers remains high due to low inventory levels and strong pricing for newly built containers. Because of that, Textainer has been able to capture higher values as its trades and sells containers to enhance its fleet.

The improvement in revenue enabled the company to boost profitability. However, earnings weren't as strong as they could have been since the company recorded $1.3 million in bad-debt expense due to two lease defaults during the quarter. In addition, interest expenses rose $5.1 million year over year due to higher interest rates and an increase in debt from the company's investments in new containers. However, those new additions should bolster the bottom line in the coming quarters as customers pick them up.

A container ship in a port at night.

Image source: Getty Images.

A look ahead

Textainer has invested more than $700 million to acquire new containers so far this year, adding 360,000 20-foot equivalent units (TEUs) of capacity. Its customers have picked up 110,000 TEUs of these containers over the past two months, which will drive revenue growth in the third quarter.

These new additions along with improving market conditions have increased Textainer's optimism. CEO Philip Brewer stated that "we believe the increased lease-out demand we have seen in June and July will continue through the third quarter."

There is one caveat with that forecast. Brewer noted that "we have not experienced a measurable impact to container demand as a result of the current trade disputes" and that "we do not expect the impact on our results to be significant" unless the disputes cause "a meaningful slowdown in global trade." He stated that "we cannot at this time predict the extent of the impact resulting from future developments."

Fellow container-leasing peer CAI International (NYSE:CAI) seemed to concur with this assessment. Its CEO, Victor Garcia, stated that the tariff discussions have not had an impact on container demand to date, though the situation "has created some uncertainty around future global trade growth." Garcia added: 

If tariffs were to be permanently implemented and overall tariff levels were to increase, we would expect supply-chain disruption as international companies adjust their supply chains. Some level of export-oriented manufacturing would likely move to other countries not affected by the tariffs, such as countries in Southeast Asia. These changes in supply chain are a positive for CAI, as our customers will need more equipment to adjust for the supply-chain inefficiencies created by sourcing changes.

Textainer's CEO made similar comments, stating that "to the extent that these disputes result in changes to established trade lanes and patterns, supply chains are likely to be rearranged and lengthened, which is generally positive for container demand."

Still very optimistic

Textainer's second-quarter results show that it is quickly turning around from what was a challenging period. The company continues to anticipate even better results in the coming quarters as it benefits from recent container purchases and from higher rates as lower-priced legacy contracts expire. While the growing trade dispute between the U.S. and China has added a degree of uncertainty, Textainer doesn't believe it will hurt its results, and could actually benefit the company and its container leasing peers if trade routes change.

Matthew DiLallo owns shares of Textainer Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.