Throughout history, the amount of trade in a region has always been a good indicator for its wealth. Technology has improved, trade has become more and more internationalized and its amount is now heavily linked with global GDP. But it is far away from being a linear relationship. While global GDP had grown 3.5% annually, global trade had a growth rate of 5.7% per year (data from 1980-2012). This trend is reflecting the effect of specialization and the tendency to produce intermediate goods in countries with low labor costs.
This huge growth is at least partially owed to increasing standardization, namely container transport. As world trade is expected to rise even more in the next years, companies active in the container business will definitely get their share of profit.
CAI International (CAP) is one of the world's leading freight container leasing and management companies. It was founded in 1989 and since that time has steadily grown its business. The company offers service in 3 different areas: container leasing, container sales (new and used) and container investment management. The last one offers institutional investors the opportunity to own their own container portfolio, while the micro-management is done by CAI.
At 31 December 2013, CAI operated a total container fleet of 1,144,454 TEUs, in which its managed container fleet had a share of 25% with a sinking tendency. TEU or twenty-foot equivalent is a unit of cargo capacity based on a 20-foot container. So, this basically means CAI operates with more than 1.1 million single containers.
Due to the nature of its business, CAI is active worldwide, with offices and agents on all continents. At the moment, CAI has an MC of approx. $500 million.
Within the last 5 years, CAI has seen a fantastic growth in all relevant figures (data from 2009-2012 from 2012 annual report, for 2013 from its last release). Total revenue went up by 166% and net income by 366% between 2009 and 2012 - the last year with a published annual report. The numbers for 2013 will be discussed below.
The biggest asset of CAI is also its most important risk: the dependency on world trade. When Lehman Brothers crashed and global flow of commodities dwindled, the effect on the company's stock price was also huge. Within the short period of 6 months, it fell by nearly 90%. But it should also be noted that even in the worst business year (2008), the company's operational business was profitable. The loss of $44.4 million (including $2.6 million in income tax!) can be totally attributed to a goodwill impairment of $50 million. One year later (in 2009), CAI was back again on the road of profitability.
Last year's figures
2013 as a whole was a bit disappointing for CAI. Although year-to-year increase in revenue was satisfactory (10%), the company's net income rose only by 1%. This trend can also be seen in the development of the stock price, where the company lost approximately 1/3 of its MC. On the other hand, Mr. Market seems to correct himself a bit: when unaudited results of Q4 were published on February 10th, one could see a rise in stock price of more than 14%.
The reason for CAI's relatively weak performance seems to be in a slight decrease in international trade in the second half of the year, which also coincides with a decline in utilization rate: 90.8% for the three months ended December 30, 2013. The same period one year ago showed a rate of 94.8%. This naturally results in higher storage costs, which eat up profits. Other competitors seem to have similar problems. CAI is definitely aware of this issue. The company has already implemented some initiatives to increase sales and maximize utilization rates, but also stated that it saw stronger demand in January. Additional information to all the facts discussed above can be found in CAI's last release.
First things first: taking into account the MC after the 14% jump ($486 million) and 2013's net income ($64 million, according to its unaudited figures), we get a fantastic P/E of 7.59. Since most of the earned money is invested back in the company, no dividends are paid. As long as there is growth potential, I don't see this as a disadvantage. P/B is also fine with just 1.17 (sum of equity is $415 million).
For a capital-intensive and fast-expanding company such as CAI, a debt-to-equity ratio of 3 is acceptable. On its debt, CAI has to pay an average interest rate of 3.7%. Cash flow from operating activities was around $120 million in 2013. No goodwill can be found in the balance, and intangible assets are down to just $677 thousand. Most of the assets (87%) are rental equipment (i.e. containers). ROCE was 18% in 2012 and 15% in 2013. All data mentioned in this section refer to the unaudited figures for 2013.
As mentioned above, the biggest risk for CAI is an economic turndown that would reduce world trade significantly. Another thread is a rising oil price that could also harm the operations of the company.
Due to the capital-intensive business model, a lack in supply of additional funds could also be devastating. Same is true for a general rise in interest rates.
Another point is the high specialization and long experience of the employees: Since there are only 91 (2012 annual report), problems in the HR sector could be severe. In a nutshell: there are quite a number of risks.
It is a well-known rule that higher returns always come with higher risks. I am very sure that the transport sector will see high growth rates in the forthcoming years due to the continuing trend of globalization. I am also very sure that some of the companies in this sector will expand way too fast or break under their financial load and will go bankrupt. But CAI has proven its success for a long time in this fast-paced business (when it started, the Berlin Wall was still standing) and dealt also very well with the financial crisis. Market also trusts the company, which could be seen when it was able to issue 15-year fixed rate asset-backed notes at a rate of just 3.35% in March 2013. (SEC filing for the period ending September 2013)
CAI would be a sound pick without any growth. But the high potential of its market makes it a fantastic choice, with an upside chance of more than 50% within a year.