Trinity Industries Inc.: Patience Will Pay Off

Trinity Industries Inc.: Patience Will Pay Off

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I think the financial performance in 2021 was rather bad, and the dividend is barely covered. I think shares are higher in price because of buybacks. These can’t last.

I’m of the view that because of the buybacks, the shares are trading near record levels. The last time they got to this level, they went on to perform badly.

This is the second of my “rethinking Class 1 Capex” articles. I want to see if my suspicions about Class 1 Capex trends are justified.

cristianoalessandro/iStock via Getty Images In this missive, I’m going to give you a rare insight into my broader thinking, dear readers. I’ve been keenly following what’s going on at various rail manufacturers and suppliers, and I’m starting to think that the uptick in demand that was interrupted by Covid is starting to return. The industries that supply the Class 1 railroads are notoriously cyclical, and I’m now opening up to the idea that things are ticking back up. If true, this will obviously impact my thesis on companies like Stella-Jones Inc. ( OTCPK:STLJF ), The Greenbrier Companies Inc. ( GBX ), and FreightCar America Inc. ( RAIL ) to name a few. In my ongoing effort to find data points to prove or disprove my evolving thesis, I thought I’d check back on Trinity Industries Inc. ( TRN ).

Since I put out my bearish piece on the company, the shares have returned about 10% against a loss of ~5.5% for the S&P 500. Since the company has released financials since then, I thought I’d check back on the name to see if it’s time to change my mind on this. In addition to pouring over the financials again, I’m going to look at the stock as a thing distinct form the underlying business.

Welcome to the thesis statement portion of the article, dear readers. This is where you get to hear my argument in broad strokes, and thus potentially insulate yourselves against the “painishment” that my writing can be. I think the financial performance in 2021 was not particularly strong, and I think the shares have remained elevated only because of buybacks. I find it interesting, and telling, that management spent fully $426.9 million in the final three months of the year, and only moved the stock price by a few dollars. I think the dividend is covered, but only barely. Finally, I think the valuation is stretched, and I would observe that the last time the shares traded at current levels, they went on to perform badly. I think investors should hold off on buying for now. We can wait longer than management can spend hundreds of millions on buybacks. When the buyback spigot dries up, I think the shares will inevitably fall, and that’s when we should buy. There you have it. That’s my thesis. If you read on, I don’t want to read any moaning in the comments section about my various eccentricities. Financial Snapshot

I think the financial performance in 2021 indicates that this is a much smaller organisation, post divestitures. For instance, revenue in 2021 was about 13.3% lower than it was in 2020, while net income was down by fully 223% from the previous year. This in spite of the fact that a host of various costs fell in 2021 as compared to 2020. For example, manufacturing costs fell 15.4%, and various selling and administrative expenses fell between 1.35% and 15.8%. 2020 was also hampered by a $396.4 million writedown that didn’t impact 2021, obviously. Also, revenue in 2021 was about $1.236 billion lower than it was in 2019, and net income was about $44 million lower. Finally, long term debt has increased by ~$153 million from the previous year. This is troublesome, especially in light of the buyback (see below). My Ongoing Problem with This Buyback

On the first page of the 2020 10-K, the company reported that as of mid February 2020, there were 110,972,157 shares of common stock outstanding. One year later, that figure had dropped to 83,342,128 shares of stock. That means that from the first period to the second, the company retired exactly 27,630,029 shares. Once again employing the skills imparted to me by the good people at Holy Spirit School during my life as a student, I calculate that the company spent ~$30.16 to retire each share. As I type this, the stock is trading hands for $31.91. So, this has created a bit of value for shareholders. But […]

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