Textainer Is a Good Long-Term Buy

 | Jan 15, 2014 | 10:00 AM EST  | Comments
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Stock quotes in this article:

tgh

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tal

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cap

Textainer Group (TGH), a manager, lessor and reseller of intermodal freight containers, has been one of my favorite companies for years because of its best-of-breed status within the secularly-growing containerized shipping industry.

Textainer's margins have been a cut above its two closest competitors, TAL International (TAL) and CAI International (CAP), since at least 2008. Despite spending a large amount of capital to expand its fleet as of late, Textainer's return on equity has stayed above 20% for the last three years. Best of all, Textainer now offers a juicy dividend yield of over 5.2% and has come down 10% since just December 27 of last year. At this valuation, Textainer now offers value, income and decent growth.

The chart above sums up the growth case for Textainer. Containerized port throughput grows by between 1.5x and 2x global GDP growth. This is a steady, but strong, trend from which Textainer and others are beneficiaries. Textainer has grown its fleet aggressively over the last five years and has managed to increase its revenue at a compound rate of 17% over that time span.

Textainer stock faced downward pressure, however, for the better part of 2013 on concerns of overzealous Asian suppliers amid a global slowdown. These concerns are understandable. Anecdotally, management recently mentioned that whenever the company makes a bid for new containers, there are often five or six competitors for the same order.

Containers also are so readily available now that many shippers no longer need to hold them in inventory. Evidence of oversupply is more than just anecdotal. For the first time in at least a few years, rental rates will have likely dropped in 2013.

 Fleet utilization for Textainer seems to have peaked at 98% in 2011 and has been gently declining since then. As of a few months ago, the company's fleet utilization sat at 95%. All this has stymied Textainer's growth, at least in the short term, as earnings for 2013 are expected to be down slightly vs. 2012.

 So the bad news is that containerized freight is experiencing a different dynamic than what it has been used to over the past five years. By no means does that mean that the growth story for this industry is over. Global GDP is forecasted to grow by 3% in 2013 and perhaps a little more in 2014. GDP growth will continue to spur disproportionate growth in global trade and port throughputs. Textainer management does not believe that these new Asian suppliers, often fueled by cheap loans, will be around for the long term. If that is the case, Textainer's situation may yet improve.

Valuation is what makes Textainer compelling right here. The company's price to earnings sits at a very reasonable 10.7x trailing earnings (and a 10.43x trailing earnings for interest, taxes, depreciation and amortization/enterprise value ratio, for those who are worried Textainer may be using depreciation to shield earnings).

           

Perhaps the most compelling case for Textainer is in the chart above. As with many other dividend-centric stocks, Textainer's stock is something of a mirror image in relation to its dividend yield. If the price action of last summer is any indication, Textainer is a buy right here. I believe that global GDP will continue to grow at about 3% per year.

While Textainer faces short-to medium-term headwinds, the company's long-term story is still intact. That makes this dip in Textainer's stock price an opportunity to for those who like income and have a long time horizon.

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