All Aboard for Profits With Trinity Industries

In October, I recommended Trinity Industries (TRN) and its core railcar manufacturing business as a way to play to the improving domestic economy. TRN shares have climbed 3.4% since then and outperformed the broader S&P 500 by close to 5% while the company declared a $0.09 per share quarterly dividend recently. While that has been good news, the better news is that domestic railcar traffic rose 2.3% year over year in November, making it the highest year-over-year percentage increase in eight months. Container traffic was also strong in November, up 3.8% year over year, marking the 24th consecutive month of year-over-year gains for intermodal traffic. Overall, for the first 48 weeks of 2011 cumulative domestic rail volume was up 1.8% from the same period last year, while trailers and containers were up 5.1% from last year, according to The Association of American Railroads. Looking at these metrics from a larger, North American perspective, better rail volume in Canada and Mexico would lead to even more favorable year-over-year comparisons. With that as a backdrop, it comes as little surprise that railcar manufacturing backlog has continued to grow in 2011. Industry backlog levels stood at stood at 65,044 units on Oct. 1, up from 57,308 units on July 1; 51,913 units on April 1; and 22,658 units on Dec. 31, 2010, according to The American Railway Car Institute. While this sets the tone for higher year-over-year production levels, which should give way to growth in both railcar deliveries and earnings in 2012, there are reasons to think the upward trend in industry railcar orders and backlog will continue in 2012. This is particularly true when we look past the rail traffic headlines and understand where the strength has been in terms of carload type. Year to date, the carload types with the strongest demand have been metallic ores (+20% year on year), metals & products (+11.6%), and petroleum products (+10.1%). That last carload type has strengthened in recent weeks as freight rail carriers have been seeing an increase in Bakken oil shipments. What's driving that improvement are companies turning to railroads as a viable replacement for trucks and pipelines. According to a report in Transportation Nation, Berkshire Hathaway's (BRK.B) Burlington Northern Santa Fe and Canadian Pacific Railway (CP) have boosted their investments to accommodate increasing oil production in the Bakken Oil Formation, a region that encompasses southern Canada bordering portions of eastern Montana and western North Dakota. While we wait to hear the fate of TransCanada's (TRP) proposed Keystone X-L pipeline that would span from the oil and tar sand fields in Alberta, Canada and extend to refineries and distribution terminals along the Gulf Coast in Texas, we have to remember that if approved it will take time to construct that pipeline. In the meantime, rail remains an efficient way to get that oil to the market. Continued share gains in the petroleum sector, as well as those from the trucking industry have led some railcar forecasters, such as Rail Theory Forecasts, to predict deliveries of more than 50,000 railcars in 2012, up from 30,772 through the first nine months of 2011. That would imply a year-over-year increase in railcar shipments in at least in the low teens in 2012. Using history as a guide, rising production and backlog levels tend to go hand in hand wither firmer pricing, which leads to a one-two combination in terms of margin improvement. This gives me far more comfort in the $2.35 per share the Street expects Trinity to deliver in 2012, which is up considerably from the $1.50 the company is tracking to deliver this year and its 2010 results of $0.84, according to Thomson One. There is more to go in the current railcar up-cycle, and that means there is more to go in TRN shares from here.

All Aboard for Profits With Trinity Industries

The railcar manufacturer stands to benefit from a recent surge in rail traffic.

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