Textainer Group Holdings: A Painful Start To 2016

| About: Textainer Group (TGH)

Summary

Shares of TGH have been cut in half in recent months.

The company is being impacted by weakness in the shipping industry and lower rental rates.

The selloff has placed TGH’s valuation at ridiculous levels.

TGH's buyback should be the primary focus for incoming cash.

One of the more baffling stocks in my portfolio is the shipping container leasor Textainer Group Holdings (NYSE:TGH). The stock was inexpensive when I initiated my position and has only fallen in value since. While I know the company is facing some major headwinds, the current valuation is frankly getting absurd.

Looking over Textainer's Q4 results

Lease rental income, one of the key metrics for the business, fell 4% y/y to $124.6 million, while net income came in at $21.4 million, or $0.38 per share, down 48% from last year.

Adjusted for one-time items, Textainer's net income was $12.7 million, or $0.22 per share, down 71%. Adjusted EBITDA, a good proxy for Textainer's overall profitability and cash flows, was down 7.6% to $104 million. For 2015, Textainer's adjusted EBITDA was $430 million, down 3% from last year.

Textainer's operating metrics were also fairly robust. Fleet utilization remained high at 95.7%, but has since fallen to 94.2%. While the EBITDA margins have increased to ~81% versus 78% in 2014.

All things considered, Textainer posted poor, but understandable numbers given the industry challenges. The net income metrics were poor, but that is largely due to non-cash charges from increased depreciation and impairment charges. Textainer's EBITDA metrics remain steady, which is important for the lenders and should help keep interest expenses low.

Outlook looks grim

As for Textainer's outlook for 2016, the company is not seeing much improvement. The main factors for this pessimistic viewpoint are as follows:

  • Weak container demand
  • Low steel prices
  • Low global interest rates

All of these are big negatives. Weak container demand is largely tied to global trade, which is not something that turns overnight. Low steel prices have crushed Textainer's used container resale prices and has resulted in large impairment charges. While low interest rates are bad for Textainer's margins, maturing leases, ~8.5% of the fleet in 2016, will be repriced at lower rental rates.

One positive for Textainer from lower interest rates is lower interest expenses. Despite a larger debt load, interest expenses fell 11% in 2015 versus 2014. With rates falling even more in 2016, expect interest expenses to continue to fall.

Conclusion

Despite weaker earnings, Textainer's cash flows have not declined all that much. There are a lot of levers Textainer can pull to increase shareholder value by using its incoming cash. One of the most obvious is share buybacks. Textainer already has a $100 million authorization and repurchased $9.1 million worth of stock in Q4. This is good enough to repurchase ~20% of the float at current prices.

As for the dividend, Textainer currently has a 10% yield, yet the cash payout ratio is ~20%. Given the extremely low valuation the stock is trading for, the company should clearly focus as much cash as it can in buying back stock.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am/we are long TGH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.