Ten Solid Clean Energy Companies to Buy on the Cheap: #5 Trinity Industries Inc.

Peak oil is likely to have everyone re-examining their transportation options over the next few years. Rail will likely be one of those options given special attention because rail transportation is inherently much more fuel efficient than road based transport.

I first mentioned Trinity Industries (TRN) in November as a rail transit related stock. I didn't give it an in-depth look because rail transit is only a tiny part of its business, but investors interested in the broader rail sector will be very interested.

Not only is Trinity focused on the most energy efficient form of land transport, its fundamentals should appeal to the value investor. A forward and trailing P/E of around 8.5 and a price to book ratio of less than 1.5 are so low, they make you wonder if something is seriously wrong with the company. The company has been investing aggressively over the last few years (something I consider prudent given the prospects of the rail industry.) The aggressive investment program has resulted in consistently negative free cash flow, and has been primarily financed by new debt. However, their debt to equity ratio is still a comfortable 0.86.

Trinity's businesses include railcar manufacture, railcar leasing, inland barge manufacture, construction materials (mostly concrete and highway crash cushions), liquefied gas canister manufacture, and Wind tower manufacture. Investors interested in efficient transport and clean energy will be keenly interested in all these businesses with the exception of construction materials and LPG canisters, which constitute[.pdf] less than 30% of revenues and less than 20% of operating profits. Interestingly, the manufacture of LPG canisters and wind towers share facilities, which allows them to buffer the wild swings in wind tower demand driven by changes in the production tax credit by shifting manufacturing between these products.

Trinity is a group of related growth businesses, mostly focused on efficient modes of transport, priced like a value company. To me, the company seems too good to be true, so I went looking for dirt in their SEC Filings. Their corporate governance seems comprehensive and robust.

The firm shows a talent for financial engineering, but only to an extent that seems appropriate to a rapidly growing company in several capital-intensive industries. This talent seems to have allowed them to secure a large quantity of low cost debt. Company insiders have been net buyers of the stock since it dropped below $40 last July, a factor which enhances my confidence of a lack of skeletons in the closet.

Trinity will release 4th quarter earnings after the close on February 20. I expect a positive earnings surprise, although given the current mood of the market, that's not a guarantee of a jump in the stock price. The 13.7% positive earnings surprise in November led to a price drop, since the surprise wasn't as big as in previous quarters.

I don't see any reason to chase this one. $29 seems like a good price to me, but the economic slowdown and a slowdown in Trinity's earning growth may provide opportunities to pick up this solid company at even lower prices.

DISCLOSURE: Tom Konrad and/or his clients have long positions in TRN.

Comments

[Ramzy]

Great article Tom, I appreciate the insight, I was unaware as to the extent of TRN's business. I was wondering if you had any thoughts on American Railcar Industries, ARII. Its a direct competitor of TRN, and with the heavy movement of coal on these hopper rail cars recently, what's your take on ARII?