Selling Out Of Trinity Industries

| About: Trinity Industries (TRN)
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Excellent company now fairly valued.

Dividend yield has decreased as shares have rallied.

Declining profit margin YTD.

In March of this year, I explained the long thesis on Trinity Industries (NYSE:TRN) which can be found here. At the time, the stock traded for approximately $19 per share and had tangible book value of approximately $19 per share.

Let's fast forward to August, 2016. I have sold my shares of TRN now the stock has gapped up to above $23 per share. Having purchased just under $19 and received some dividend money, the stock has offered me a return of approximately 25%. I am very happy.

Although I originally expected to hold the stock to about $28, the reasons for selling and taking my money elsewhere were very compelling. Since March, the tangible book value per share has risen to just above $23 and the share price closed recently at $23.45. Some of the factors which I originally looked for ware the share buyback which happened in the first quarter but stopped completely for the second and the potential of a shareholder activist to get involved. Thank you to ValueAct Capital who announced their involvement near the end of July. It gave the stock a nice boost.

Trinity is itself a fantastic company in a cyclical industry which in my opinion will offer incredible value every 5 years of so. Given the ammunition which has been used in the share buyback, the activist investor getting involved and the share price which has risen from its lows (reducing the dividend yield), I believe the stock has done very well for me.

When Babe Ruth offers to hit a homerun for you, then he does, you don't ask him to go and hit another homerun for you. He's already delivered for you.

At the current valuation, the stock is trading at tangible book value with a dividend yield under 2%. Although there's nothing bad here, the clincher for me came when the Net Income / Revenues fell to 8% YTD. (YTD includes Q1 and Q2). In the past 2 years, the profit margin has been 12.5% (2015) and 11% (2014). If this clincher is not enough, keep reading.

As we know, the cost to transport goods by rail is significantly cheaper than by truck when oil is over $100 per barrel, but at $40, it's really not so clear. The transportation time is obviously much faster by truck than by rail, but without a significant price advantage, why take longer? Let's just get the goods on a truck.

All things considered

Assuming the guidance of $2.20 EPS is correct, (the first 2 quarters EPS total was $1.26), the $23.45 price tag gives a buyer a P/E of 10.66 and tangible book value of about 1.0. Although a number of railcars will be taken offline as they no longer meet regulations, the reality is clear: low oil prices translate to less being shipped by rail. The shares of TRN may easily go to $30 in value, but could just as easily reverse course back to the teens. The orders for new rail cars may be delayed for one to two year if oil does not pick up.

Although I have exited the position, by no means will this be the last time I am long on TRN. I believe it is a fantastic company at a fair valuation, but not a "backup the truck" valuation. If oil prices stay low for a little while, there may be an even better buying opportunity to be had down the line.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.