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Trinity Industries (NYSE: TRN) is an interesting little company in one of our favorite spaces: railroads. Trinity maintains, builds and leases railcars to the likes of Burlington Northern, CSX, Norfolk Southern, as well as a host of other rail companies.

The Rail Industry

First and foremost, we should discuss the rail industry as a whole. If you recall, Warren Buffett purchased a significant stake in Burlington Northern, signaling that he believes the rail industry will outperform. If you look at the economics of the rail industry, you find it is significantly affected by fluctuations in oil prices. One would think that higher oil prices would be detrimental for rail shippers, and while it certainly does hurt their bottom line, that’s not exactly how one should look at it.

The rail industry is competing against other shipping industries. The most prominent competitor is the trucking industry. For many years the price of oil was low and the trucking companies could ship goods for less. If you were running a business and needed to ship goods en masse, you would have searched for the cheapest and most reliable method, and that would have been through trucks. Now, however, oil is breaking through new records and the tables have turned. Trucking, which relies even more heavily on oil prices than rail does, is facing serious cost increases and is forced to pass the increased expenses onto the customer.

Enter Railroads

Shipping through rail is becoming increasingly attractive for those businesses that need to ship goods within North America. Why? Every dollar that oil goes up hits the trucking industry far harder than it hits the rail shipping industry. Consider this:

A train can ship 1 ton of cargo 400 miles on 1 gallon of diesel, whereas a truck can ship 1 ton of cargo only a hand-full of miles on 1 gallon of diesel.

This is exactly why Mr. Buffett decided to invest in railroads. He knows the economics of the industry in and out, and knows that businesses are making the switch. Mr. Buffett also knows the increasing usage of biofuels - such as ethanol and biodiesel - are opening up a whole new market for shippers to attract.

So, why Trinity?

Trinity Industries is a small-cap play that will benefit tremendously as rail shippers seek to purchase new railcars. In addition, Trinity is seeing an increase in repair and maintenance of older railcars. Trinity has increased it’s backlog significantly; further indication of increased capex by rail shippers.

As for the valuation of Trinity, we see that their price-to-earnings ratio is very reasonable, sitting at 7.5. They maintain a dividend of 1.1% and their dividend record shows that they have continued to pay a dividend each quarter since 1987, when the company was formed.

Summary

Trinity is in a wonderful industry and is generating substantial new business. They are undervalued in just about every metric, and they have paid a dividend for more than 20 years. The company probably won’t produce eye-popping results, but it is extremely likely that Trinity will outperform the market for many years to come.

As always, do your own due diligence and make your own decision.

Disclosure: none

Source: Rail Carrier Trinity Appears Undervalued