CAI International's Reposition Strategy Fails To Address Bottom Line Concerns

| About: CAI International, (CAI)

Summary

Year-to-date, CAI’s stock price has gone up by 97.69%, and currently, it is trading at $17.14 per share.

CAI’s quarterly revenue has more than doubled in the last five years, but their ROE in 2016 decreased to 1.33%.

CAI management emphasis on increasing utilization rates to 98% in coming months leaves little room for improvements, as it cannot go above 100%.

We believe with the current reposition plan, CAI may not be able to reach breakeven by the end of 2017.

Although the price target of $20 per share set by SunTrust Banks Inc sounds realistic amid the strong bullish momentum, we are skeptic about CAI’s reposition plan to strengthen the.

Figure 1: CAI International Inc's Stock Price Has Almost Doubled Since the Start of 2017

Since CAI International Inc (NYSE:CAI) released their Q4 2016 and full year 2016 financial results, their stock price resumed the uptrend and currently trading at $17.14 per share, which represents a 97.69% increase since the start of 2017.

On February 19, 2017, SunTrust Banks Inc increased the price target for CAI International Inc to $20 per share, and we believe the strong bullish momentum is likely to push the stock price towards the stated price target in the next few months.

However, we are concerned that CAI International Inc's management may not have a concrete plan to increase their rate of return, which has been dismal for the last few years, as return on equity decreased to 1.33% in 2016.

While CAI International Inc's reposition plan sounds good on paper, and it may help increase the revenue of the company in the coming quarters, we would like to warn investors that they should be cautious about increasing their exposure to CAI International Inc, and should wait for results before joining the bullish bandwagon.

Takeaway from CAI International's Q4 2016 and Full Year 2016 Financial Performance

On February 14, 2017, CAI International Inc released its Q4 2016 and 2016 annual financial results, which showed the company had earned a total $78.47 million revenue in the last quarter of 2016 and a total $294.35 million in the year 2016. Compared to $65.69 million revenue in Q4 2015, this year's Q4 revenue of CAI International Inc increased by around 19.46%.

Figure 2: Over the Last Five-Year Period, CAI International Inc's Quarterly Revenue Increased by 99.13%

In the recent past, CAI International Inc has consistently managed to increase their top line. In fact, the top line has doubled in the last five years.

However, despite a growing top line, CAI International Inc's net income came out at only $0.74 million in Q4 2016, and for the full year 2016, earnings came out at only $6.11 million.

It is worth noting that in 2015, the annual revenue was $249.67 million, and the earnings were $26.84 million, which means over the last one year, CAI International Inc's earnings declined by 77.24%.

We believe the decline in earnings were caused by a significant reduction in their gross margin, which came down to 46.88% in 2016 compared to 59.98% in 2015.

Figure 3 : CAI International Inc's ROE Continued to Decline Over the Past Five Years, and in 2015, It was at 5.95%

As a result, CAI International Inc reported only a 1.33% return on equity in 2016, compared to 5.95% in 2015. Unless the management takes some serious steps to restore gross margins in the coming quarters, there is a strong possibility that by the end of 2017, the company would not be able to break even.

Management Plan for Repositioning CAI International

During the Q4 2016 earnings call, the President and Chief Executive Officer of CAI International Inc, Victor Garcia, tried to assure investors that the dismal financial results of the last four quarters reflect their effort to dispose of non-productive idle assets. "Our priority is to release capital in low return assets and position our fleet for high utilization and financial returns over the coming quarters," he said during the earnings call.

Besides indicating how this reposition plan is underway, he also explained why the bottom line of the company suffered so much in the last quarter of 2016. "Our results this quarter was negatively impacted by the loss on sale of equipment and cost and incentives to have our equipment repositioned for lease," he noted.

However, he tried to portray a positive outlook for the coming quarters by mentioning that the utilization of owned equipment of CAI International Inc increased from 93.9% at the end of the third quarter to 95.6% at the end of the fourth quarter of 2016.

While a 95.6% utilization sounds confident, it also underlines that there is not much room to improve the utilization of owned equipment rate in the future. Even if the utilization rate goes up to "98% in the coming months," as he hoped, and the revenue continues to increase, there is no guarantee that CAI International Inc would be able to improve its bottom line.

We are already pleased with the revenue growth in the last five years. CAI International Inc management deserves the credit for trying to increase market share and ensure revenue growth, but Mr. Victor Garcia so far failed to convince that the repositioning strategy would pay off at the end, where the rate of return would likely to increase.

Conclusion

While the market seems to be trusting the management with the repositioning plan, as the stock price has gone up by 97.69% since the start of 2017, we would like to warn investors that there is no concrete plan to increase the rate of return.

We would like to remain optimistic about CAI International Inc's future. However, when the CEO of the company tries to cheer up investors with a repositioning plan, then the next minute he mentions their "logistics business faced a challenging environment due to the slow growth of the U.S. economy and low freight rates by shipping line," it is rather hard to keep our hopes up.

Last week, SunTrust Banks Inc increased the price target for CAI International Inc from $18 per share to $20 per share, and this price target might be reached in the first quarter of 2017 because of the strong bullish momentum.

However, we would urge secondary investors to wait for the result of the repositioning plan, and consider increasing their exposure to CAI International Inc only after the management delivers a healthy return on equity.

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.

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