Saturday, October 4, 2008

This squirrel would buy TRN on Monday

I am anxiously awaiting the 3rd quarter reports. The market has been viscious lately and taken all companies down indiscriminately. At least I think it has been indiscriminate.

Two of my biggest losers have been ADM and TSO. Both have been killed by hedge fund deleveraging. Additionally, ADM has been punished by the commodities rout even though it is a processor, not a raw material provider. Its earnings should look good and hopefully will see some recovery in share price. Tesoro has been pushed down by fears of demand destruction. People may be driving less, but oil is costing TSO a lot less and they have dragged their feet on decreasing the price of gasoline. Earnings should be decent and hopefully I can recoup some of my money. NCC also will provide more clues to their collection efforts and future pofitability. So, I’m looking forward to the 3rd week of this month for answers.

I have opined about waiting to buy shares and then index funds when the time is right. I still believe that is the prudent course of action. But I’ve become intrigued by a company that is causing me to look in the mirror and see if my pair even meagerly compares to my squirrel friend. If the market hasn’t caused severe shrinkage, I plan to buy some shares. But, this time, I will build my position over a three month period in case the market continues to hammer even leading companies.

Trinity Industries is the vixen that has caught my eye. TRN is an American manufacturer with large operations in Mexico. Its been around since 1933. It is the largest manufacturer of railcars, barges, and highway guardrails and crash cushions.It is a leading maker of wind power towers and LPG tanks. It also has a large railcar leasing business and is in aggregates and concrete in Texas, Arkansas, and Louisiana.

Why buy a manufacturer? Because this one is very good and very cheap. It is, and will continue to, benefitting from the following trends:
1.Green power. their wind tower business is up from $11M in 2004 to $425M this year. their tower backlog is $1.5B!!
2.Barges and trains are efficient users of fuel and both fleets are old. Both are in the midst of a large replacement cycle which has many years to run. TRN has a backlog of over $3B, 4.6B total, which gives excellent visibility into 2009. Almost all railroads and barge shippers are doing well financially so they can buy and pay.
3.The movement of renewable fuels is by train and barge and is growing. Agricultural products and coal also move the same way. All of those areas remain strong and subject to government subsidy.
4. The current economic stimulus bill enhances accelerated depreciation which encourages purchases of manufactured goods.
5.Any upcoming stimulus likely will focus on highway spending which will benefit the company’s guardrail and crash cushion business as well as their concrete and aggregates business in the important state of Texas.

The current share price is attractive. At $21 you are buying the company for only 4.5 EV/EBITDA, .88 of BV, 6X forward earnings, and a PEG ratio of 60. This is a company with a ROE of 19%, only 48% of capital in debt, and paying a dividend [yield about 1.7% ] on the 10th. There $425M revolving credit agreement runs until 2012, has no usage outstanding, negating the need to access credit at this perilous time. Their 2nd quarter earnigs were excellent and they raised annual guidance at that time.

Over the past month the share price has decline from $34 to $21. Some of this was due to their largest shareholder, Jeffery Gendell [hedge fund], reducing its stake in the company. If what I’ve laid out above is accurate, then he sold to raise cash for redemptions, not dissatisfaction with TRN’s performance. He’s sold abot 3M of his 10M shares. He may continue to sell and depress the price further. Several days ago TRN bought back 2M shares, at $21.15, privately, likely from Gendell, which brings their purchases for the 3rd quarter to 2.7M shares. They spent $61M or $22.50. Book Value is $22.50! That type of repurchase is unheard of and an excellent use of corporate cash as opposed to the way most corporate managements use repurchase programs to prop stock or disguise the impact of stock option issuance. These purchases will actually help earnings per share and benefit common shareholders.

Good balance sheet, good income statement, good backlog, good customers, good industries, good government incentives, good guidance, good corporate governance, good entry price equals good investment. But I’m only going to buy a little at a time as my hands are still bleeding from some of my other well thought out blunders. It’s time for me to look in the mirror.

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