Later this month, after the close of the market on October 26th, the management team at Trinity Industries (NYSE:TRN) is due to report financial results for the firm's third fiscal quarter this year. Leading up to that, I figured now would be a good time to look at not only what analysts are expecting for the firm but also what I believe investors should keep a close eye out on. In what follows, I will do just that and provide my thoughts on the business as a whole.
What analysts think
As of the time of this writing, analysts are not particularly enthusiastic regarding Trinity and its prospects for the quarter. If their forecasts are correct, for instance, the business should generate sales during the quarter of about $1.21 billion. Though this is a nice chunk of change, it does represent a decline of 21.4% compared to the $1.54 billion the firm generated the same quarter a year earlier. While it is possible that some segments, such as its Construction Products Groups and maybe its Energy Equipment Group, might fare well during the quarter, the firm will be slammed by its Rail Group and its Railcar Leasing and Management Services Group.
On the bottom line, the picture looks less appealing. For the quarter, analysts expect Trinity's earnings per share to come out to $0.52. This would represent a massive decline of 60.3% compared to the $1.31 per share seen the same time last year. The overall disparity between the drop in sales and the drop in profits will be driven, if analysts are correct, by margin contraction, which is common as firms lose economies of scale as they shrink and as they have to contend with immovable fixed costs that are there even if they don't generate revenue.
What I believe investors should keep an eye out for
For starters, I should clarify that Trinity is, as of the time of this writing, my largest holding. After shares of Chicago Bridge & Iron (NYSE:CBI) fell and after shares of Trinity increased significant due to ValueAct buying up a sizable chunk in the firm, the two swapped spots in my portfolio without me changing my share composition. Having said that, I am incredibly bullish on Trinity but as I see the energy market changing, I am considering reducing my position and allocating that capital toward some pure play energy companies. Even after such a sale, though (if I do it), Trinity will still be my largest or second largest holding.
With that out of the way, I do believe that investors should keep an eye out for a couple of things regarding the firm. The first relates to the sales and profits figures forecasted by management. In the first two quarters this year, the company's sales came out at $2.37 billion, down 28.2% from the $3.30 billion seen the same time a year earlier. I would suspect a similar decline this quarter as well (so sales that would miss forecasts) given the tough energy environment. With that in mind, however, I would be shocked if earnings drop by as much as analysts anticipate.
During the first two quarters this year, the firm's earnings per share came out to $1.25, down 49.2% from the $2.46 per share seen last year. Given the fact that sales are expected to fall by less this quarter year-over-year than it has in the first six months of 2016, combined with the fact that management is likely doing all that it can to focus on margin improvements, it's hard to believe that sales could fall less but earnings could fall more (adjusted for impairments and similar items).
More importantly than that, however, I am intrigued by what kind of news or developments may come about as a result of activist activities. Earlier this year, ValueAct announced that it had acquired a 6.8% share of the business (10.4 million shares) but in September that stake increased, at prices close to Trinity's current price, to 7.9% of the business, representing just a hair over 12 million shares.
Despite the fact that Trinity is embroiled in a tough lawsuit that it is appealing, the news on that front appears to be positive thus far and if the firm can win its case (which I think is probable) or at least get a reduced payment amount ruled against it, the upside could be tremendous and I believe that ValueAct understands that. With cash and cash equivalents (including marketable securities) of $814 million, plus a further $183.3 million in restricted cash (so $997.3 million cash and cash equivalents total), Trinity has an amazing amount of liquidity and this could be used for acquisitions, a one-time dividend payout of a large dollar amount, or something else entirely. Now, I do not expect the company to make a decision on what it will do with its cash until the lawsuit is behind it, but we may be able to get some clues about the future path management will take now that an activist is involved and is likely to be pushing for changes.
Based on the data provided, investors in Trinity are looking at a tough quarter, but I don't believe analysts are likely to be right (or too close to right) on both the top and bottom lines. On top of that, with ValueAct involved in Trinity even more and its ownership approaching something truly meaningful, some sort of action by the firm that could be aimed toward rewarding shareholders (I hope for an acquisition) may be on the horizon, pending a successful conclusion of its current legal issues.
Disclosure: I am/we are long TRN, CBI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.