Trinity Industries (TRN) vs. GBX and WAB

Investment Analysis Clubs Saul’s Investing Discussions
#1

BACKGROUND

In January 2014, I conducted my due diligence on companies (TRN, GBX, ARII and RAIL) that manufactured railroad cars, in particular, oil tank cars. Back then, these companies could not make these cars fast enough to meet the huge demand during the recent oil boom.
http://discussion.fool.com/the-pipeline-on-wheels-31055324.aspx

I decided to invest in Trinity Industries (TRN) which continued to grow and realize substantial gains.
http://discussion.fool.com/updaterailtank-car-makers-keep-on-rol…
On 20 June 2014, TRN stock split 2:1.

On 1 October 2014, TRN as well as GBX and WAB began a steep nose dive along with falling oil prices. Soon after, I bailed out. TRN plunged from $46.67 to a low $24.41 in January 2015. Since then, I updated my prior due diligence efforts and decided to reinvest in TRN which is now on a robust rebound, up 48% from its 52-week low.

FINANCIAL COMPARISONS: TRN VS. GBX AND WAB

My decision to re-invest in TRN was based in part on the following financial comparisons and analysis, which I’ve updated and revised for this post (removed ARII and RAIL and added WAB).


	                    TRN	   %	  GBX	   %	  WAB	  %
		                change		change		change
Revenue(in billions)						
2009	                  2.162		1.018		1.401	
2010	                  1.930	-10.7%	0.756	-25.7%	1.507	 7.6%
2011	                  2.938	 52.2%	1.243	 64.4%	1.967	30.5%
2012	                  3.811	 29.7%	1.807	 45.4%	2.391	21.6%
2013	                  4.365	 14.5%	1.756	 -2.8%	2.556	 6.9%
2014	                  6.170	 41.4%	2.203	 25.5%	3.044	19.1%
						
Net Income (in millions)						
2009	                 -137.7		-56.391		115.055	
2010	                   67.4		  4.277		123.099	 7.0%
2011	                  142.2	111.0%	  6.466	 51.2%	170.149	38.2%
2012	                  255.2	 79.5%	 58.708	807.9%	251.732	47.9%
2013	                  375.5	 47.1%	-11.048		292.235	16.1%
2014	                  678.2	 80.6%	111.919		351.68	20.3%
						
Diluted EPS						
2009	                  -0.91		-3.35		1.19	
2010	                   0.43		 0.21		1.28	 7.6%
2011	                   0.88	104.7%	 0.24	 14.3%	1.76	37.5%
2012	                   1.59	 80.7%	 1.91   695.8%	2.60	47.7%
2013	                   2.38	 49.7%	-0.41		3.01	15.8%
2014	                   4.19	 76.1%	 0.44		3.62	20.3%
						
Market Cap	          5.58B		1.62B		9.23B	
						
PE (ttm)	           8.55		12.22		26.46	
Forward PE	           8.98		 9.58		20.60	
PEG	                   0.83		 0.86		 1.67	
						
Price/Book (mrq)	   1.86		 3.08		 5.05	
Price/Sales (ttm)	   0.90		 0.71		 3.00	
						
Profit Margin (ttm)	 10.99%		 7.02%		11.55%	
Operating Margin (ttm)	 18.72%		11.92%		17.31%	
						
Cash (mrq)	         0.962B		0.145B		0.425B	
ROE (ttm)	         23.08%		35.90%		20.70%	
Total Debt/Equity	104.90%		83.79%		28.82%	
Current ratio	          2.37		 1.95		 2.22
						
Dividend	          0.40		 0.60		 0.24	
Payout ratio	          1.10%		 1.00%		 0.30%	
						
52-wk high	         50.77		78.32		97.16	
4/10/15 price	         35.82		61.53		95.80	
52-wk low	         24.41		42.62		69.45

Note: I used diluted EPS data, since no non-GAAP financials were included in 10-K Annual Reports.

As a value investor, TRN satisfies almost all of my financial metrics and clearly out performs GBX and WAB in growth of revenue, net income and earnings. TRN’s price/book is the lowest and less than my 2.2 metric. TRN’s PE and forward PE are attractively very low at 8.55 and 8.98, respectively, and PEG is less than 1.

As a value investor, I usually am debt adverse and favor and look for companies with Total Debt/Equity ratios less than 40%. One reason that TRN and perhaps GBX have high total debt/equity is both have a leasing segment; WAB does not. TRN has developed a unique approach to the railcar leasing model, while still able to provide long-term railcar contracts to the largest North American leasing railcar company, GATX Corporation (GMT). Competitors like America Railcar Industries (ARII) now follow the TRN railcar leasing model, which is a testament to Trinity’s success. Timothy Wallace, the TRN Chairman, CEO and President, related the following in a past earnings conference call:
Over the last decade, we’ve spent the majority of our resources building our leasing fleet and our leasing platform, and we didn’t do a lot of acquisitions during that time period. Over the last couple of years, as the economy has improved, we began to acquire companies that we saw a really nice fit in our portfolio. As our backlog has improved and the financial metrics of the company have substantially improved, we’re thinking bigger and larger in terms of acquisitions, and we’re not really interested in the quantity that we would do. So we’re not trying to do a whole lot of them. We’re more interested in the quality and the value that we can bring. And so we have – like I said, we brought on resources, we’ve worked with the last couple of acquisitions that we’ve done, we have an external resource that’s really perfected our processes in integrating companies successfully, we acquired a public company maybe 3 years ago and integrated that company with the assistance of this external consultant and it worked really nice for us. So we’re really in a good position to begin to move forward in this area.
More recently, Wallace reported:
Our Railcar Leasing and Management Services Group also delivered record financial results for the year. Pretax profits increased 160% in 2014 to a record $363 million, due in part to a higher level of leased railcar sales as well as record leasing profit from operations. Lease renewal trends remained positive, supporting longer lease terms at higher rates. At the end of 2014, 99.5% of the 75,930 railcars in Trinity’s wholly owned and partially owned railcar fleet were on lease, a tribute to this group’s strong railcar marketing capabilities.
In comparison, GBX’s leasing fleet is 8,600 cars.

For those interested, here’s the latest TRN Investor Presentation, March 2015 which provides such hilights:
http://www.Trin.net/TrinNetSelfServiceweb/Content/Aspx/Displ…
• Trinity delivered 30,255 railcars representing 44% of industry shipments during LTM 12/31/14.
• Trinity received orders for 51,395 railcars representing 37% of the industry total during LTM 12/31/14.
• Trinity’s order backlog was a record 61,035 railcars representing 43% of industry backlog as of 12/31/14.
• Trinity’s record $7.2 billion order backlog reflects a favorable mix of railcars and the strength in the pricing environment for certain railcar types due to strong demand from the oil, gas, and chemical industries.

The presentation also shows that TRN is more diversified than GBX and WAB with the following business segments:

                                            2014 Revenue
•  Rail Group                                    $3.817 B
•  Railcar Leasing & Management Services Group   $1.118 B
•  Energy Equipment Group                         0.992 B
•  Inland Barge Group                             0.639 B
•  Construction Products Group                    0.552 B
•  All other                                      0.110 B

TRN is the top performer and leader in this railroad sector. As always, conduct your own due diligence.

Regards,
Ray

27 Likes
#2

Hi Ray,

Thanks for this awesome post.

I hadn’t paid any attention to TRN … but I guess I should! TRN, by the way, is held by Jim Mueller in the Messed Up Expectation portfolio. See here for a writeup:
http://www.fool.com/investing/general/2014/09/04/3-reasons-t…

Anirban

#3

Hi Ray,

Sorry for spamming you!

A few questions and random thoughts.

  1. The EPS data for GBX looks like it got messed up, right. GBX’s diluted eps for 2014 if to indeed is $0.44 won’t yield the PE noted in the writeup.

  2. Based on forward PE, PEG, and PS metrics, it looks like GBX and TRN are running neck to neck. However, GBX also has the lowest profit and operating margin of the three, and I know from reading GBX 10K and recent commentary that management is working hard to bring up those numbers. That’s part of their turnaround story. In that sense, given that the rest of the metrics are similar, I would think GBX has the best upside.

  3. Looks like TRN is more levered up than GBX, although not that much more. WAB is the least levered up among the three.

  4. GBX’s ROE is pretty high. I like that.

  5. Among these, GBX is the smallest player. From my reading of GBX’s 10K and their recent results, it looks like GBX has been gaining market share and they also have a strong backlog.

Given the above, my initial gut reaction would be that GBX offers the best upside among these three companies. It could also be an acquisition candidate given its a smaller player that’s rapidly gaining market share.

Anirban

2 Likes
#4

Anirban,

Thanks for your feedback.

You have a good eye and fiscal sense. GBX’s EPS for 2014 should be $3.44, not $0.44. My computer worksheet table shows 3.44, but I must have deleted the 3 digit, when realigning table numbers to properly display on the TMF format.

In one of my referenced past posts, I mentioned that Carl Icahn’s American Railcar Industries Inc. (ARII) attempted to acquire competitor Greenbrier Companies (GBX). Billionaire Icahn actually tried twice in 2008 and 2012.
Here’s an interesting read and look back.
http://www.investopedia.com/articles/active-trading/12/icahn…
GBX rejected his offer, and Icahn sold off over 65% of his stake, dropping his ownership of the rail car company from 9.9% to 3.4%.
http://www.insidermonkey.com/blog/billionaire-carl-icahn-dum…

Regards,
Ray

2 Likes
#5

Nice write up, Ray. Thanks for sharing.

Just one comment…

ROE (ttm) 23.08% 35.90% 20.70%

Maybe I missed it in the write up, but if not, I think ROIC is a better comparison than ROE for these companies. ROE can be misleading when there is debt.

I did a quick and dirty based on most recent fiscal year end (August for GBX)…took an average of two years for balance sheet items, ignored operating leases for now, and adjusted for one-time items for GBX and TRN.

TRN ROIC = 12.8%
GBX ROIC = 14.5%
WAB ROIC = 16.7%

Also did a back of the envelope weighted cost of capital:

TRN = 5.9%
GBX = 5.6%
WAB = 6.9%

Higher for WAB because equity costs more than debt and its financing is 78% equity.

The numbers are likely wrong because I did this real fast. Just wanted to throw out the idea of using ROIC instead of ROE here.

Thanks again,
Ears

2 Likes
#6

Hi Ray, Very interesting write-up. Sounds like an interesting company.

Do you have any clarification of what this is all about? I found it in the last quarterly earnings press release.

On October 20, 2014, a jury in a federal district court returned a verdict against the Company in a False Claims Act (the “Act”) case and awarded $175 million in damages. The jury’s damages award, to the extent it survives the Company’s challenge in post-trial motions or on appeal, is automatically trebled under the Act to $525 million. Additionally, the district court is required to impose civil penalties for each violation of the Act (which penalties are not automatically trebled). The district court has not yet entered a final judgment or determined a civil penalty amount. The Company maintains that the allegations are without merit and intends to vigorously defend its positions in post-trial motions and on appeal. Pending entry of a final judgment and completion of the Company’s post-trial and appellate activities in this matter, the Company currently does not believe that a loss is probable, therefore no accrual has been included in the consolidated financial statements.

It sounds as if they have a verdict against them in a Federal Court for over $525 million (not exactly clear how much above $525 million as they say “the district court is required to impose civil penalties for each violation of the Act”, but they don’t say how many are alleged or how much the penalties are).

That sounds like a lot of money, but although this is a verdict already in against them in a Federal Court, they say THEY don’t believe the case has merit, so they aren’t taking ANY ACCRUAL against possible loss. Does that sound prudent? And do you know what the case is all about?

Just wondering.

Saul

#7

Ears: I think ROIC is a better comparison than ROE for these companies. ROE can be misleading when there is debt …
Also did a back of the envelope weighted cost of capital

Ears,

You are absolutely correct and right on. I am aware of the relationship between debt and ROE and how one can be manipulated to affect the other.

My dilemma is that I’ve found calculating Return of Invested Capital (ROIC) a daunting task, and calculating Weighted Average Cost of Capital (WACC) near impossible. If calculating ROIC involves making judgment calls, calculating WACC deals with so many variables and also requires making judgment calls. You can put ten CPAs in a room and ask them to calculate ROIC and WACC for a particular company, and most likely their findings will be close, but not all will match up. Therefore, I do my ROIC and WACC calculations for only my personal use. I’m looking for ROIC to be greater than WACC and follow the advise of one of my all-time TMF favorites Andrew Chan, a CPA who no longer participates on TMF message boards:
If you stick to this simplified formula, you should do quite well in calculating ROIC for your companies. Whenever in doubt, think cash, think in terms of operating activities, think in terms of capital invested and think conservatively. There is no need to be aggressive, you are only kidding yourself!

Way back on 9/27/00, Andrew Chan posted the most comprehensive and still one of the best articles on ROIC calculations, and, more importantly, explained why without WACC, ROIC is not very useful.
http://www.fool.com/news/foth/2000/foth000927.htm

Before I move on with further insights on ROIC, another concept must be introduced: the weighted average cost of capital (WACC). For without the WACC, ROIC is not very useful. The WACC represents the minimum rate of return (adjusted for risk) that a company must earn to create value for shareholders and debtholders. ROIC is measured against the WACC, which is what makes it such an important concept.??When the ROIC is greater than the WACC, it means that the firm creates value; otherwise it destroys value. In practice, a company with a ROIC of 25% and a cost of capital of 11%, has created 14 cents of pure economic value for every dollar invested. The difference between ROIC and WACC is called the ROIC-WACC spread (%), which is one of the most important valuation tools in securities analysis. ??

So what does all this mean for investors? To start with, Fools would be better off tracking ROIC-WACC spreads than EPS, net income or ROE. Studies have shown that stock prices are highly correlated with ROIC-WACC spreads. Value creation is the key, simply looking at EPS or net income does not indicate whether a company creates value or not. In some cases, even high sales growth can be harmful as new capital is being invested in value-destroying projects. EPS, net income, and growth does not tell how much capital was required to generate those numbers, which is a fundamental flaw in using these traditional metrics.

For those interested, here’s another excellent primer by TMFValuemoosie:
Calculating ROIC part 1: Invested Capital
http://discussion.fool.com/calculating-roic-part-1-invested-capi…
Calculating ROIC part 2: NOPLAT, where I asked for WACC calculations.
http://discussion.fool.com/calculating-roic-part-1-noplat-279663…
ROIC and WACC calculations
http://discussion.fool.com/roic-and-wacc-26708068.aspx

Thanks Ears for bringing up this very important matter for investors looking for value.

Regards,
Ray

1 Like
#8

Saul,

This is an ongoing whistleblower case that originated in 2005. On October 20, 2014, a federal jury decided that Trinity Industries should pay $175 million in a case brought by a whistleblower who questioned the safety of thousands of highway guardrail end caps.
Here some articles about the decision.
http://www.wsj.com/articles/jury-awards-trinity-whistleblowe…
http://www.nytimes.com/2014/10/21/business/jury-says-trinity…
According to the WSJ article, the TRN stock price declined sharply after the announced verdict, falling 12% during regular trading. I did not experience this, since I had already bailed out of my TRN position earlier that month.

The TRN Form 10-K Annual Report for FY ending 12/31/2014 provides more info. Here are a few excerpts:
The District Court has not yet entered a final judgment or determined a civil penalty amount. While the Company believes the District Court does not have the evidence required under the law to quantify civil penalties, the total range of loss in this case, based on the jury’s verdict and Mr. Harman’s damage model for civil penalties, is $525 million to $709 million, exclusive of attorney’s fees, costs, and interest.

The Company maintains that Mr. Harman’s allegations are without merit. Accordingly, the Company intends to challenge the damages award on the ground of insufficient evidence and to vigorously defend its positions in post-trial motions and on appeal to the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”). Such post-trial motions and appellate review will result in certain legal expenses, including potential costs associated with posting a supersedeas bond upon the District Court’s entry of a final judgment. The face amount of such bond could equal the amount of the final judgment entered plus twenty (20) percent. The Company has confidence that such bond will be issued if, when, and to the extent required.

Texas A&M Transportation Institute (“TTI”), a member of The Texas A&M University System, designed the technology employed in the ET Plus. The Texas A&M University System is the owner of patents issued by the U.S. Patent Office that cover the ET Plus. Trinity Highway Products manufactures and markets the ET Plus pursuant to an exclusive license granted by The Texas A&M University System of their intellectual property.
(snip)
Pending entry of a final judgment and completion of the Company’s post-trial and appellate activities in this matter, we currently do not believe that a loss is probable, therefore no accrual has been included in the accompanying consolidated financial statements.
(snip)
On October 21, 2014, in light of the jury’s finding, the FHWA requested that the Company perform eight (8) additional crash tests of the ET Plus to support the FHWA’s ongoing evaluation of ET Plus performance. The eight tests were comprised of four tests at a guardrail height of 27 3/4" and four tests at a guardrail height of 31". On October 24, 2014, the Company issued a press release stating that it will stop shipments of the ET Plus until additional crash testing of the ET Plus was completed. The requested tests were conducted in December 2014 and January 2015, in accordance with Report 350 at Southwest Research Institute, an FHWA-approved and independent research facility. Report 350 sets forth the performance evaluation criteria applicable to the ET Plus and many other roadside safety features used on U.S. highways. The ET Plus extruder heads tested in all eight tests were randomly selected by the FHWA from inventory at the California Department of Transportation. These extruder heads were representative of what is in use on U.S. and Canadian highways.

On January 27, 2015, Trinity Highway Products completed the eighth, and final, test. On February 6, 2015, the FHWA released the crash test results of the first four tests conducted at the 27 3/4" installation height of the ET Plus. This release reports that the ET Plus passed Report 350 crash test criteria at the 27 3/4" guardrail height. The vast majority of guardrails installed on the roadways in the U.S. and Canada are at the 27 3/4" height. These test results validate Trinity Highway Products’ long standing position that when installed, maintained and impacted within the Report 350 standards, the 27 3/4" height ET Plus performs to Report 350 criteria. When all eight test results are reviewed and released by the FHWA, the Company will perform a thorough analysis before resuming any shipments of the ET Plus to its customers.

Is it prudent to take no accrual? Who knows; it depends on how long the post-trial motions and appellate process will take (most likely a long time) and whether or not it goes in favor or against the company.

Regards,
Ray

#9

Thanks Ray. I think that may be more complicated than I want to deal with, but I’ll think about it.

Saul

#10

There is more to the Trinity lawsuit story that may be relevant. Harman, the plaintiff in the suit, apparently copied and manufactured the Trinity product, then stopped manufacturing the product after being sued for patent infringement.

http://fox6now.com/2014/02/11/lawsuit-blames-guardrail-failu…
“The original design was an ingenious product,” says Harman. “I have repaired them and seen people survive accidents they shouldn’t have.”
Actually, Harmin did more than just repair them. A few years ago he started making what Trinity calls a “copy” of its patented ET-Plus guardrail terminals. Trinity sued Harman for patent infringement and Harman’s companies stopped production.
“They’re idle at this point,” Harman says.
Now, Harman is a man on a mission to prove Trinity’s own guardrail terminals are dangerous. In 2012, he filed a lawsuit, accusing Trinity of making secret modifications to the ET-Plus that were never disclosed to the Federal Highway Administration.
“They took a product that was working just fine and, in order to make more money, they changed it,” Lawrence says.
According to the lawsuit, sometime between 2002 and 2005, Trinity reduced the size of the ET Plus feeder channel from five inches wide to four. More important, says Lawrence, is what they did to the inside of the terminal.
“They essentially shrunk it,” Lawrence says.
• KEY DOCUMENTS:
• Trinity’s patent infringement lawsuit against Harman
• Harman’s whistle-blower lawsuit against Trinity
• Trinity’s defamation lawsuit against Harman
• Harman’s timeline of events
• Trinity’s letter to state DOT’s about Harman’s allegations
• Trinity’s official statement to FOX 6 News

Regards,
Drake54

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