Textainer Group Holdings: A Bet on Global Shipping

| About: Textainer Group (TGH)

I was thinking about updating my recommendations for bulk shippers last week when all of a sudden the group got upgrades from two analysts and the whole sector started to move in a positive direction. This, of course, is a good thing particularly if you've been holding on to them as I suggested. Certainly they've been through a rough patch, along with everything else, but most of them have continued to pay a dividend and as the market improves those dividends will begin to increase.

The reason I was taking a fresh look at the shipping group was that I caught an interview with John A. Maccarone, the CEO of Textainer Group Holdings Ltd. (NYSE: TGH), on CNBC. He came across as a lucid, conservative fellow who is heading up an interesting business.

Textainer, which is based in Bermuda, leases shipping containers. In fact, they are the largest shipping containers leasing company in the world with over 1.3 million of them in circulation. I actually wasn't aware that there was a company that did this, which was an oversight on my part since I love the shipping industry. But, thinking about it, it makes perfect sense that there would be company that manages all these containers we see moving from port to port on cargo ships as well as on trucks and rail cars around the world.

I find the shipping business to be of special interest because it's almost a sure indicator of how world trade is faring. If this company isn't moving a lot of containers, you can be sure that world trade is in the dumps. Not surprisingly, their business was down 25% last year.

There are apparently three different types of freight containers. Dry freight containers are by far the most common but there are also special purpose and refrigerated containers. The company also buys and sells used containers and according to their website they've sold over 53,000 per year over the last five years.

Textainer operates worldwide with offices in South America, Europe, the Mediterranean region, the Middle East, Asia, and Africa. The big Singapore office handles Southeast Asia, China, and Australia.

There are two basic sizes of containers: 20 footers and 40 footers. The 20 footers are used primarily for heavier goods like machinery and the 40 footers are used for the lighter products like computers, desks, toys, etc.

The company has over 400 leasing customers, which include all the world's major shipping lines, and over 900 container sales customers. They have offices in more than 130 ports around the world so they truly have a global footprint.

What was encouraging, listening to the CEO, was that he had seen a distinct pick-up in activity for the Christmas season. November and December bookings were very high which indicated to him that the world was beginning to restock from very low inventory levels. This indeed is a proverbial canary in a coalmine and it sounded like the canary is beginning to sing.

The more I looked into Textainer, the better I liked it. The stock, which closed on Friday in New York at $15.68 (figures in U.S. dollars) is trading at a forward P/E of 10.6 times and is yielding 6.1%. Textainer has been a steady dividend payer since it started trading on the NYSE in 2007, with the quarterly dividend currently 23c a share (92c a year).

The company's dividend policy is to pay about 50% of net income (excluding unrealized gains/losses) to shareholders. It is currently above that level, at a 78% payout ratio, but even at this level the company says it is still able "to pursue accretive opportunities". The dividend is reviewed quarterly by the board of directors which "sets the dividend subject to various factors including cash needs for opportunities that may be available". Although a dividend cut is feasible, I do not expect it to happen unless we experience a double-dip recession that stalls world trade again.

The stock is approaching the top of its 52-week range but then what isn't? The company's margins have improved year-over-year, including in 2008 which was a difficult year for just about everybody. Prior to the meltdown revenues had been growing at a 13% clip as had earnings-per-share.

I'm especially impressed by the fact the company has managed to turn a profit this year, even with world shipping activity well down. For the third quarter, Textainer reported net income attributable to common shareholders of $13.5 million (28c per share, fully diluted) on revenue of $56.1 million. For the first nine months of fiscal 2009, net income was $65.4 million ($1.36 per share) on revenue of $170.1 million. Although revenue is down 20% year-to-date and profit is off 10%, these are good numbers in the context of the economic environment.

Commenting on the results, Mr. Maccarone said:

Given the broad economic and industry challenges Textainer has faced this year, we are encouraged by our achievements during the third quarter and first nine months of 2009, as well as the company's strong long-term prospects. Our strategy of securing a significant percentage of the company's fleet on long-term lease agreements, which now accounts for greater than 70% coverage, continues to have a positive effect on our utilization rate.

During a challenging time for the industry, we are also pleased to have continued to take advantage of accretive growth opportunities. We were able to conclude transactions year-to-date totalling nearly $200 million in cash consideration, which consisted of growing the company's total fleet, increasing the percentage of the fleet that it owns, expanding its presence in the refrigerated container business, purchasing containers for its trading business, entering into purchase-leaseback transactions with shipping lines, and retiring debt. These transactions have increased our earnings potential, strengthened our balance sheet and enhanced our industry leadership.

The balance sheet comment is particularly relevant as Textainer announced it reduced overall debt by $90.5 million over the first nine months of the year. So the company is not overburdened with debt and with sales volumes picking up they should be in position to keep a healthy dividend. In fact, my guess is they will begin to increase it as the economy improves.

I think this is an excellent way to play an improving global economy alongside the shippers I previously recommended.

Disclosure: Author holds a long position in TGH

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