Shares of Trinity Industries, Inc. (New York Stock Exchange: TRN) is down about 12.5% against a flat market since selling its shares in mid-December last year. A more mature man than me could probably avoid bragging about this. You know that such behavior is unseemly. I’m not that mature, so there may be some barely disguised boasting sprinkled throughout this article. Anyway, I’ve held this stock for a long time in the past and I’m not against it becoming so again, so I thought I’d check the name again to see if it’s worth buying back. , a stock trading at $26 is a much lower risk investment than the same stock trading at $30. Now that the company has reported their final year results, I will review them and compare them to the ratings.
We are all busy people. The weekend is approaching. I think most of you are wondering which one to choose with so many amazingly cool things to choose from. For example, “Dating a supermodel” or “Planning a transatlantic balloon trip.” I’m also busy with having to buy new dice for Sunday night’s Dungeons and Dragons game. Either way, we all have distractions. As a result, I am providing a thesis statement so that you can quickly learn my conclusions and quickly get out before being exposed to “Doyle Mojo.” you’re welcome. I think the financial results here are better than last year in some respects, but in my view the multi-year trend is very dire. and debt levels have exploded. While this is unlikely to jeopardize his 2023 or his 2024 dividend, the 2025 debt service schedule is grim in my view. This could become a problem if interest rates stay elevated longer than is commonly thought. That said, the stock isn’t objectively cheap, so I’d still recommend keeping the name aside. Finally, the world of investing is inherently relativistic. If you buy ‘X’, you are, by definition, choosing not to buy a large number of ‘Y’. With that as background, why would I risk more than his year treasury and get paid 166 basis points less for trouble? finish. If you read on from here, it’s up to you. I don’t want to hear groans in the comments section about the constant bragging and the fact that I spell words like “behavior” properly.
In my view, the recent results have been reasonable, neither great nor terrible. For example, compared to 2021, revenue in 2022 is approximately 30.4% higher. Net income fell, but that was largely due to the company making his $131.4 million gain on discontinued assets in 2021. Stripping out that one-off event for him puts the net profit at around $10 million, putting him 20% higher than he did in 2021.
At the same time, it must be said that the company has not yet recovered to pre-pandemic levels. Revenue and net profit in 2022 are down 28% and 56% respectively from 2019. Also, today’s balance sheet has approximately $725 million more debt than it did in 2019.
It should be noted that the capital structure continues to deteriorate, with long-term debt increasing at a CAGR of around 5.3% since 2014, while sales are declining at a CAGR of 8.7%. In my view, it’s not a big trend.
I love financial history as much as the next well-adjusted accounting nerd, but when it comes to investing, people are clearly more interested in the future. , obviously the dividend and whether it is sustainable. I’m very much an “accrualist,” but when I look at dividends, I focus on cash. Specifically, we want to compare the size and timing of future contractual obligations to current and potential future cash sources. Let’s start with obligations.
For your enjoyment and enlightenment, we’ve pulled the following debt repayment schedule from page 85 of the latest 10-K. From this, the calendar shows relatively light repayments of $242 million this year, $655.9 million next year, and just under $1.5 billion in 2025. potential dividend payments.
Against these obligations, the company has approximately $79.6 million of cash on its balance sheet and has generated an average of $415.6 million in cash from continuing operations over the past three years, generating an average of $172.4 million in cash from continuing operations. Investing. It should be noted that his CFO from continuing operations in 2022 is down from $615 million the year before to just $9.2 million. Additionally, his CFI in 2021 was actually positive as a result of the aforementioned discontinued operations gain.
Given the above and being in a world where the company is making about $60 million using about $207 million in interest, I would happily buy it for the dividend, but the stock is very should be traded at a reasonable price. Price in my view.
If you read my articles regularly, you know that I consider stocks and businesses to be two different things. For example, this business manufactures rail cars. Stocks are like “electronic paper” and are traded and affected by many factors. Some of them have nothing to do with business. For example, one of the things that influences the performance of certain stocks is the crowd’s ever-changing perceptions of the desirability of “stocks” as an asset class. There’s no way to definitively prove this, as it’s an obvious counterfactual, but Trinity’s 11.75% loss after I took the chip off the table would have been even more An interesting argument can be made to suggest that things have gotten worse. after that. Stocks can be affected by central bank activity, but it may not affect business much in the long run. Moreover, stock prices are affected by the “shoot, aim and be prepared” reaction to a catastrophic derailment, such as the recent one in East Palestine, Ohio, even if the company had no involvement in the disaster. There is a possibility.
These are some of the reasons I think of stocks as separate from businesses. In many cases, the former is insufficient to speak for what is going on in the company, and I think it is possible to take advantage of this disconnect to make a profit. The only way is to find discrepancies between what the crowd assumes about a particular company and subsequent results. I absolutely hate having to be reminded of this but I found a discrepancy between the price and the likelihood of future outcomes so my narrative profit of the share price plummeting ever since I sold So when I buy, I want to see stocks that outperform expectations with crowds that are somewhat pessimistic. Stocks are cheap when people are pessimistic, so I try to buy only cheap stocks. So today’s work involves determining if the stock is reasonably priced.
There are several ways to determine if a stock is cheap, from simple to more complex. Simply put, we want to look at the ratio of price to a measure of economic value and see stocks trading at a discount to both the market as a whole and the history of the stock itself. In case you don’t remember my most recent deal for some reason, I remember I took the Trinity chip off the table when the price-to-sales ratio was 1.45 and the reserve price was about 2.5 and the dividend yield was 1.45. please give me. was about 3%. Fast forward to the present and this is the state of the world.
The stock is 16% to 23% cheaper and the dividend yield is about 20% higher, depending on how you measure it.
My regulars know that ratios are a useful starting point, but they also want to understand what the crowd is currently “assuming” about the future of a particular company. If you’ve been reading this, you know that I rely on the work of Professor Stephen Penman and his book “Accounting for Value”. In this book, Penman shows investors how to apply high school algebra magic to standard financial formulas to understand what the market “thinks” about the future growth of a particular company. I’m here. This involves isolating the “g” (growth) variable in this equation. If Penman’s writing feels a little thick, you might want to crack the spine of “Expectations Investing” by Mauboussin and Rappaport. The two also introduced the idea of using the stock price itself as a source of information to infer what the market currently “expects” about the future. Applying this approach to Trinity at the moment suggests that the market expects the company to grow permanently at a rate of around 6.7% from current levels. I think this is a very optimistic forecast. Especially since the company has yet to return to pre-corona levels of profitability. The last time I reviewed Trinity’s share price, the market seemed to think growth was around 6%, so I’m a little optimistic at the moment.
everything is relative
In the world of investing, everything is relative. When you buy X, you are, by definition, avoiding a lot of Y. In my opinion, the most rational approach to this is to find the best return while minimizing risk. Given this, I think it’s worth remembering that a risk-free one-year treasury would earn 166 basis points more than this stock would pay. It doesn’t make much sense to me to make less dividend income in order to take on more risk. As such, I continue to avoid these stocks and instead deposit my capital in risk-free instruments.