Rail Carrier Trinity Appears Undervalued

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

Comments

[chazzzzz:]

Let us not forget Trinity's fast growing wind turbine business. The thought of T Boone getting into to the wind farm business might very well lift Trinity long term.

2008 Apr 23 05:19 AM

[Dart:]

TRN makes wind towers not wind turbines, big difference.

Long TRN

2008 Apr 23 07:05 AM

[redbaron:]

And the barge making business, which is an even cheaper way per cargo ton/mile to move bulk cargo, than by rail.

2008 Apr 23 08:51 AM

[Healthy:]

This company is extremely undervalued presently. It should be selling in the $40's.

2008 Apr 23 09:39 AM

[Ryan Freund:]

I agree that the structural wind tower and barge industries are very promising for TRN. It's basically a mutual fund of the best industries out there, without the management fee! TRN should be selling in the mid $40's.

Thanks for the comments.

2008 Apr 23 10:00 AM

[R. Richard ...:]

It would be worthwhile to reflect on Peter Drucker's observation back in the 70's that P/E ratios may very well reflect the effects of cost of capital (and the potential for its recovery) to any particular enterprise.

Drucker wrote that in a critique of "Earning per share."

The cost of capital varies to every distinct enterprise, affected inter alai by the use (long term depreciable assets, e.g.) to which put, competitive factors (moat width), etc., etc.

As to Buffett and rails, the "exactly why" may be incomplete. One must consider the particular selection and how it may differ from some of the B-H criteria. Example: What does the rail line haul, to where, for whom, is it changing, and if so, how has it changed its coverages of its cost of capital (vital in rails). In B-H, nothing is as simple as it is pronounced, or perceived, the internal understandings run quite deep.

2008 Apr 23 11:31 AM

[R. Richard ...:]

Oh, yes, one should also be aware of RailCar America (RAIL), and the excellent analysis recently by Phillips at 10Q detective.

2008 Apr 23 11:33 AM

[Jake2:]

Freightcar America (sic) RAIL may be best of breed in this sector. TRN is down 40% plus or minus past year; RAIL less.

2008 Apr 23 12:03 PM

[Mort:]

Trinity and Westinghouse Air Breaks, WAB, ran many months head to head, with the same valuations, spliting and then returning in a week or so. Since the big realignment, WAB fully recovered, and Trinity has lagged. Other posters have suggested mid 40's, and that is exactly where WAB is, so I expect Trinity to follow sooner or later. Hopefully sooner.

2008 Apr 28 02:55 PM

[Ryan:]

WAB is an excellent company as well.

2008 Apr 28 06:09 PM