What I'm Expecting From Trinity Industries

| About: Trinity Industries (TRN)

Summary

Shares of Trinity Industries have been demolished in recent months, driven largely by terrible expectations for 2016.

This seems to be setting Trinity up for a wash this quarter, but some (certainly not all) data from rival Greenbrier implies the picture may not be that bad.

Investors could certainly see trouble this quarter if things don't go well for Trinity, but the company has some things working in its favor that leaves upside potential.

As my firm's second-largest holding, Trinity Industries (NYSE:TRN) is one of two companies I need to pay especially close attention to. One such important time for the business is when management releases earnings, which are due to be reported on April 21st after the markets close. For those who follow me and like my work on the company, I figured it would be a good idea to know not only what analysts are expecting, but also what I think is realistic moving forward and how it should impact the business.

Analysts have low expectations

On the top line, analysts don't seem to be expecting all that much from Trinity. If forecasts are accurate, the business should report sales this past quarter (Q1 2016) of just $1.34 billion. Although this is a nice chunk of change for people like you and I, it will actually represent a fall-off of 17.8% from the $1.63 billion management reported for the first quarter of 2015. More likely than not, the drop in sales will come from most segments (perhaps even all), but I'd imagine any large decline like this will be mostly attributable to Trinity's Rail Group and its Inland Barge Group, both of which have seen backlog fall significantly year over year in 2015.

On the bottom line, the picture is supposed to be even worse. Current data points to earnings per share of about $0.70. This, if it ends up being the case, would mean net income of around $104.72 million, unless the company's share count changed during the period. Unfortunately for shareholders, this would be well below (by about 38.1%) the $1.13 in earnings generated during the first quarter of 2015. All in all, I'd suspect that the main contributor to the disparity between the fall in sales and the fall in earnings will be Trinity's fixed costs rising as a percentage of total revenue, since sales will be falling (which is a margin killer), but another contributor will likely be the business's product/service mix, some of which should be offset by fewer shares outstanding, I'd imagine.

What are my thoughts?

There's no denying that this is set to be a tough year for Trinity and the railcar industry as a whole. According to management, sales are expected to drop this year from last year's $6.39 billion, while earnings are forecasted to come in between $2 and $2.40 per share, down significantly from 2015's earnings of $5.08 per share. This anticipated fall in sales and profits sheds some light on analysts' forecasts, but I have to wonder if this will truly come to fruition.

You see, while there's no denying that the backlog for Trinity is falling ($6.19 billion at the end of 2015, compared to $8.13 billion at the end of 2014), data seen by one of its rivals so far this year has been slightly uplifting. In its latest quarterly release, Greenbrier Companies (NYSE:GBX) claimed that backlog stands at $3.96 billion, down just very slightly from the $4.1 billion seen at the end of November last year. Though the backlog data for Greenbrier shows a sharp decline from the prior year's quarter, when it stood at $4.78 billion, recent data suggests some pricing power amongst companies in this space. In its most recent quarter, Greenbrier reported an average price per railcar in its backlog of $116,000, up from $115,000, a slight improvement during a time when you would imagine that prices would fall a good amount. In all fairness, some of this change could be due to a shift in product mix, but it's still nice to see firmness in the industry.

This, to me, gives some hope that Trinity will likely fare okay during its earnings release. With a market that is seeing resistance to falling prices so far, this may help from an earnings standpoint for the company and, hopefully, will provide stronger-than-expected sales. Even if this is the case, though, I believe the company will certainly see both metrics fall year over year, and investors should be prepared for that. The ultimate question is by how much they will fall.

Another point to address here relates to Trinity's current legal dispute over its ET-Plus System railguards. As many of you already know, a court ruled against the business some time ago (in 2014) regarding its ET-Plus System railguards, meaning that amounts due to be paid by the business total $682.4 million as of the time of this writing. This is, for a company as small at Trinity, quite large, but I think there's a good chance management will provide some guidance on the issue that will be favorable to investors.

Already, the FHWA (Federal Highway Administration) has reaffirmed that these railguards can be used moving forward, and multiple tests have shown them to be safe. In addition to this, the Fifth Circuit has claimed that an argument can be made that Trinity's actions were not material and no false claims "based on certification" were presented to the government by the business. Added to this is a slew of support from third parties who believe the prior ruling to be unjustified and that it should be reversed. These include, but are not limited to, groups such as Mothers Against Drunk Driving, the American Tort Reform Association, the U.S. Chamber of Commerce, and 11 separate states.

Takeaway

At first glance, it appears as though the quarter may be a wash for the company, and that could certainly be true. However, with the performance generated by Greenbrier in its latest quarter from a backlog and pricing standpoint, and the world seemingly against Trinity, I'd say a positive surprise should not be ruled out whatsoever. Add to this the progress being made on the legal side, and I believe the prospects for Trinity are looking very positive heading into earnings.

Disclosure: I am/we are long TRN.

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.

Additional disclosure: I may end up buying shares of GBX as well, but I have not made up my mind regarding this.