Shares of container lessor Triton International (NYSE:TRTN) were stuck in neutral for much of 2018, weighed down by fears of a trade war between the U.S. and China and concerns about a slowing global economy. If the company's recent results and guidance are any indication, investors can breathe easier about what's in store for 2019.
Triton plays an important, if often overlooked, role in the international shipping business as the world's largest lessor of intermodal containers. The company's fleet of more than 5.5 million 20-foot equivalent (TEU) units -- the standard rectangular metal boxes stacked at ports and transported by ship, rail, and truck -- are leased to most of the top 10 global shipping lines via its network of 26 offices in 14 countries.
Here's a look at how Triton navigated 2018 and what investors should expect from the company in 2019 and beyond.
Growth despite headline risk
Triton reported adjusted earnings of $1.25 per share in the fourth quarter on revenue of $370 million, beating the $1.16 per-share earnings and $363 million sales consensus estimates. The quarterly earnings result was up 7% from the third quarter and up 47% year over year thanks to an 8.8% increase in revenue-earning assets and direct operating expenses that were down 23% for the year.
In 2018, Triton purchased $1.5 billion worth of containers. The company had an average utilization rate of 98.6% for the year, fueling revenue growth.
Triton was guarded on first-quarter guidance, forecasting net income to come in below fourth-quarter levels due to typical post-holiday seasonal weakness in shipping and unusually low prices for new containers that could at least temporarily eat into leasing demand. Triton said new container prices have fallen to $1,700 per TEU, down from a range of between $2,100 and $2,200 for most of 2018, on lower steel prices and competition among manufacturers.
Company chairman and CEO Brian M. Sondey on a call with investors predicted that pricing will improve in the months to come, allowing Triton more pricing flexibility as the year continues:
Our view is that right now, the selling margins are at an unsustainable level and that the manufacturers [are] selling containers for not much more than the materials cost of producing the containers. And our expectation is that, as we come back from Chinese New Year and the factories adjust their ship capacities, and also demand improves seasonally, and that all else equal, we'd expect the prices to have upward pressure from here.
Using the International Monetary Fund's estimate of 2019 global gross domestic product growth of 3.7%, Triton is forecasting container trade growth of between 4% and 5% for the year.
Leasing over buying
With leasing rates set to climb, shippers might be expected to consider buying containers instead of doing business with Triton, but other trends in the industry are pushing business toward Triton and the other lessors.
Shipping lines already battling excess capacity and high debt loads from investments in mega-vessels and wholly owned terminals are now trying to adjust to new emissions restrictions. An International Maritime Organization regulation that requires the sulfur content in fuel to drop from 3.5% to 0.5% by 2020 is forcing shippers to do costly overhauls of older engine equipment, driving up expenses in a business where many key players are already struggling to generate free cash flow.
In response, shippers are moving toward an asset-light model with stripped-down balance sheets, which includes leasing containers instead of carrying a large inventory on the books.
On the call, Triton's John F. O'Callaghan, global head of field marketing and operations, said that push toward leasing helped fuel growth in 2018 and should continue into the foreseeable future.
"Due to continued steady container growth in 2018, we did well in part because of our competitive strength and position in the market, but also because our customers did not buy containers in meaningful numbers and therefore mostly relied on leasing," O'Callaghan said. "We continue to expect our customers to rely heavily on leasing due to continued financial challenges and as they focus their capital investment elsewhere."
Triton is an industry leader in a vital market trading at just 1.195 times book and 7.7 times earnings. There are admittedly significant risks, including the potential for trade wars and a slowing global economy outside of the U.S., that are keeping investors on the sidelines. But Triton is well positioned to do well in any scenario short of a sustained global recession.
The consensus forecast is for trade growth, and as the world's largest lessor, Triton should be best positioned to take advantage of that growth thanks to shipper reliance on leasing over owning containers. The stock could stall while investors wait to see if that forecast materializes, but shareholders can enjoy a robust 6% dividend yield while they wait.
Triton might not be a household name, but it's a solid company and a good investment for anyone who wants greater exposure to international trade.