A sector that I have been following closely for several years has been container leasing. Container leasing is a simple, easy to understand business; that's why I like it. Companies engaged in the leasing business lease containers and related equipment primarily to shipping companies though railways, trucking and other industries utilizing containers are also customers, albeit on a smaller scale.
As a result of the carnage in the shipping industry during the financial crisis of 2008-2009, shipping companies have suffered from compressed margins caused by an influx of new-build ships depressing charter rates. In spite of the massive difficulties suffered by many shipping companies, goods still need to move and the overwhelming majority of the world's commerce travels by water.
The Case for Leasing
Container Leasing companies furnish manifold benefits to their clients and investors for several reasons:
The ability to fix costs and logistical flexibility - Container leasing provides carriers the opportunity to lease the exact amount of containers that they will need for a voyage for a fixed period of time, thus establishing fixed costs and reducing uncertainty. Why would you buy a house if you are only going to visit a country for a few months? Same kind of logic.
Low cost of revenue and a small number of employees -- These types of business are run out of an office and through agents around the world. Aside from investment into equipment, there is very little overhead as container inventories are managed through databases. None of these companies has more than 200 employees.
Inventory that retains value - Containers and related equipment that have reached the end of their useful lifespan can be sold for scrap or to third parties, allowing for a recovery of capital.
A low interest rate environment - All of these companies operate with a significant amount of debt. Normally I eschew companies with large amounts of debt, however in this case I believe that this is not a problem because of the high container-fleet utilization rates, the essential function of containers, high profit margins (All of the companies mentioned have a net profit margin in excess of 20%, one over 30% and one over 40%) and the continued demand for reducing carrier costs in the shipping industry.
Uncomplicated expansion possibilities that will track an increase in global commerce - All these companies have to do to expand is to buy more containers and related equipment and lease them. Shipping companies will be burdened with a glut of new ships over a very long period. As the volume of goods shipped increases, more containers will be used.
Three Dividend Payers: TGH, TAL and BOX
All three of these companies offer significant dividends, better yet, all three have increased their dividends over the past several years and I believe that they merit further investigation, especially in regards to discovering which of the three has the highest degree of safety due to the large amount of debt employed in the industry.
Textainer Group Holdings Limited - (TGH)
The largest by market capitalization, at $1.95 Billion, Textainer currently offers a dividend of 5% with a P/E Ratio of 8.78 and has consistently increased its dividend since going public. Currently priced around $35 per share against an EPS of 3.99. Textainer has a book value of $17.4 and total cash per share of $2.04. The company periodically issues equity to finance expansion, which caused the stock to take a dive in 2012. Normally I am extremely wary of this practice; however I believe that due to the high profitability of the enterprise, each dollar of stock issued to finance growth will be able to generate value greater than the short-term dilution suffered by shareholders. The company also has a payout ratio of .39, leaving plenty of room for the reinvestment of earnings into more growth. I also believe that the senior notes and debt obligations of this company will be in an inherently stronger position by virtue of having a larger amount of (what I believe to be quality) equity in front, and could be fruitful areas for further research.
TAL International Group, Inc. - (TAL)
Currently offering the highest dividend of the bunch, TAL International has a PE ratio near 10, with a 6.4% dividend. TAL has a price of $38.30 against an EPS of 3.85 and a market cap of $1.29 billion, placing it in second place by size. TAL has a book value of $18.1 and cash per share of $1.59. In addition to leasing equipment, TAL also offers an equipment trading and a logistic service which complements its main line of business. TAL returns over half its income to shareholders, with a payout ratio of .58.
Seacube Container Leasing - (BOX)
The smallest of the dividend paying trio, Seacube went public in 2010 and currently has a market cap just south of $400 million. The company has a P/E ratio of 8.52, EPS of $2.29 against a price of 19.55. The company has continually increased its dividend and currently yields 6.14%. The company has a book value per share of $12.14 and cash per share of $.89 with a payout ratio of .57. The company has a large amount of refrigerated containers and the ancillary generator sets which are used to transport perishable cargo including agricultural commodities.
The Earnings Retainer: CAI International - (CAP)
CAI international has a P/E ratio of 7.75, a book value of $14.37 and cash per share of $.79. A net profit margin of over 30% and EPS of 2.99. The company has a market capitalization just south of $400M. The company also boasts a high level of insider ownership, with a little over 38%. I am a fan of high levels of insider ownership, especially in businesses which are easy to understand with high net profitability and uncomplicated yet promising growth prospects.
Despite the fact that the company does not pay a dividend, I believe that the shareholders of CAI will have their retained capital adequately utilized. Accumulated earnings have the potential to be redeployed into more assets and compounded at a high rate of return. CAI's leasing portfolio includes regular containers, refrigerated containers and specialized equipment, offering a diversified mix of essential equipment. I would speculate that there is also the chance of the company following its peers and declaring a dividend in the future. However, it is entirely possible that the company will be able to utilize its retained earnings to obtain a higher rate of return which will be reflected in the share price. From a perspective of value creation, I view either outcome to be satisfactory.
Slow Steam Ahead!
Another factor that I believe is to the benefit of container leasing is related to a cost cutting measure implemented by shipping companies in light of the oversupply of new-build ships: Slow steaming. Slow steaming is a term that describes a practice which involves reducing the average speed of ships as they make their voyages in an effort to save on fuel expenditures. In addition to saving on fuel costs, this practice helps to accommodate larger numbers of ships which have recently entered the global ship supply. The more days a ship is on a voyage, the longer a carrier has to rent containers for - putting more money in the pockets of container lessors and their shareholders.
The Whole Sector?
If an investor is optimistic about the prospects of the entire sector, he or she could elect to purchase equal dollar amounts of all four of these companies to create a homespun index fund. I believe that the industry is robust and will remain so until the shipping industry completes its long road to recovery. However, because of the risks inherent to companies that utilize large amounts of debt, I would monitor the average fleet utilization rates for each company, a statistic which is mentioned in their corporate reports. A precipitous drop in fleet utilization could signal trouble. Expansion is a dangerous proposition unless it is met with commensurate demand, prudent financing and executive temperance.