By Roy Ward
One of my subscribers to the Cabot Benjamin Graham Value Letter, Chris M. from Illinois, brought a terrific company to my attention recently. It’s one of the biggest companies in the intermodal container business, and is experiencing a huge increase in demand for the use of its containers.
TAL International Group (NYSE:TAL) is one of the world’s largest lessors of intermodal containers and chassis. The company buys intermodal containers that can be transported on ships, trucks and railcars, enabling containers full of goods to travel great distances with a minimum of handling.
TAL’s operations include buying, leasing and subsequently selling multiple types of intermodal containers. TAL is also involved in reselling containers to container traders and users of containers, as well as financing port equipment, such as container cranes, reach stackers and related equipment. The company owns 856,000 intermodal containers.
Demand for containers dwindled in 2009, but rebounded with a vengeance in 2010. TAL’s utilization rate reached a record 98.6% at the end of 2010 despite adding 180,000 containers during the year. Container purchases are primarily financed by the company’s bond offerings. TAL’s bonds are rated “A” by Standard & Poor’s and carry an interest rate of 4.8%.
Strong demand is causing a global shortage for containers, which is driving leasing rates and resale prices significantly higher—all to the benefit of TAL. Part of the stronger demand can be attributed to reduced direct container purchases by TAL’s shipping customers to avoid new capital expenditures.
TAL has already ordered another 180,000 containers for delivery in 2011, many of which have already been committed to leases. As a result, the company expects profits to accelerate during the next several quarters. Sales increased 7% and EPS catapulted from $0.72 in 2009 to $2.32 in 2010. My best guess is that sales will rise 18% and EPS will increase 25% to $2.90 in 2011. Growth in 2012 will likely decelerate.
At 11.9 times my 2011 EPS estimate and with a big dividend yield of 5.2%, TAL shares are very attractive, but speculative. I recommend buying TAL at the current price.