Textainer Group: Counting on Container Shortages, Slow Ships to China

The Baltic Dry Index, which measures changes in the cost to transport raw materials by sea, can be used to predict fluctuations in supply and demand for commodities as well as the prices of shipping company stocks. The index was cut in half from a peak in October to a January low, and it has been steadily rising back to its peak level. Not coincidentally, the demand for cargo containers has been going up as well, and there are shortages of the containers reported everywhere in the world, including the U.S.

A recent story in the Los Angeles Times reported on the problems caused by the container shortage at U.S. ports. Companies and agricultural producers with American goods bound for overseas can’t find enough cargo containers and have to wait weeks to get space on ships headed to Asia.

So that brings me to the company best placed to respond to and profit by the container shortage: Textainer Group Holdings (TGH), the world's largest provider of dry freight containers on lease, with a total fleet of more than 1.3 million containers. The company leases containers to more than 300 shipping lines and other leasers, including the world's top 20 container lines. Textainer has a worldwide network of 14 regional and area offices and over 300 independent depots in more than 130 locations. The company also resells containers, and this part of the business appears to be growing fast.

The stock price didn’t go anywhere after the company’s IPO last fall, and the stock plunged along with the market in November, following the Baltic Dry Index to a bottom at the end of January, and it has followed the Baltic back up. It jumped nearly 10% following its quarterly report on May 21^st but has pulled back a bit. The company reported that total revenues increased by 22% to $72.2 million in the previous year’s quarter, primarily due to a 337% increase in trading container sales. And I think there’s still plenty more upside.

Disclosure: I hold shares (long) in TGH.

Comments

[nScout:]

Being also long TGH, I found this article interesting especially about the correlation between the price of TGH and the Baltic Dry Index. Where do you find quotes of this index though? TGH has also returned to leasing refrigerated containers and quickly booked a large order of these.

2008 May 23 04:38 AM

[hawsepiper:]

Please note that dry cargo containers have nothing, absolutely nothing to do with the Baltic Dry Index. BDI applies to bulk shipping, not containerized shipping. These ships carry commodities like iron ore, grain, coal, etc. in bulk, not in containers.
Container ship operators charge their own freight rates that have nothing to do with BDI.

2008 May 23 09:00 AM

[Carol Flake...:]

I realize that the Baltic Dry Index does not indicate rates specifically for container shipping. I didn't say that it did. However, it does provide an indicator of demand for shipping and for commodities and can be used as a more general predictor. Many analysts use it. I've found a correlation by looking at the charts of the BDI and certain sectors.

nScout, you can watch the index by looking it up on Bloomberg: www.bloomberg.com/apps.... Investools also has some charts. For up-to-the-minute specifics, including specific routes, you have to subscribe to the Baltic Exchange.

2008 May 23 09:31 AM

[nScout:]

To C. Chapman: thanks for the clue.

2008 May 23 10:19 AM

[Urbane Gori...:]

My understanding is that containers are primarily produced in China and filled and shipped here.... I just heard tell that containers are now being used to ship drybulk out of the US and other countries as the drybulk carriers are pretty much fully booked and apparently it is cheaper to use containers now than drybulk shipping for commodities such as grain, rice etc..

Thx jegan ;-)

2008 May 23 04:55 PM

[wyattsalpha:]

John Egan-
You are correct that agents and shippers are starting to use ISO dry containers to ship dry-bulk. However, the ISO container spec has inherent design deficiencies that may undermine the perceived efficiencies of using dry containers in this manner.

Also, the time correlation of available container supply-to-booking schedule-to-port load/ship-load capacity may not allow any new efficiencies to be realized. Basically the physical and booking infrastructure are inadequate to handle quick-peak demand market conditions. By the time that the industry has ‘caught-up’ via container inventory supply and booking/ship-load capacity, the volatile nature of the industry as a whole may mellow, negating the economy for a re-tooled supply/infrastructure. SO much volatility. So little scalability.

Thoughts?

2008 Jul 06 05:54 PM