a bad day at the office

A lot of investors have been struggling this week with a consistently bad tape, but Wednesday was particularly painful around my neck of the woods. First thing in the morning, CNBC’s Jim Cramer told millions of viewers that a story in the Wall Street Journal was “disastrous” for one of the largest holdings in my fund’s portfolio, Trinity Industries (TRN). The stock instantly melted down and dropped almost 9 percent on the day, erasing months of solid gains. It dropped another 4 percent yesterday.

Ouch.

I respect Jim Cramer a great deal for his knowledge, his energy, and his charitable works. And I pride myself on never “promoting my book” by getting into pointless he said-he said debates about stocks. (When I say, “promoting my book,” I don’t mean my forthcoming book Dead Companies Walkingavailable for pre-order now!–I mean my book, as in my fund’s portfolio.) I’m not a “buy, tell, sell” guy looking to make a buck by convincing other people to copy my trades so that I can sell into a temporary rally. I hold my average investment 12-24 months, and I want my performance to be a function of my intellectual ability, not my skill at promoting myself or my fund. But in this case, I am genuinely confused by Mr. Cramer’s claims about Trinity and other railcar manufacturers.

Far from being disastrous, recent news only bolsters my confidence in the company.

The Wall Street Journal story Cramer alluded to reported that oil and railroad trade groups are asking the government to give them more time to retrofit existing railcars or build new ones that carry crude oil from the Bakken shale region in North Dakota:

Industry groups representing railroads and energy companies on Tuesday told the U.S. Transportation Department that they need more than two years to build safer railcars to haul crude.

The department’s Pipeline and Hazardous Materials Safety Administration in July proposed safety rules for oil trains that would create new standards for tank-car brakes, other components, speed limits and special routes around populated areas. The department’s proposals also seek to scrap some of the oldest railcars while upgrading others.

The proposals were in response to a series of oil-train accidents that began in July of last year with a derailment and fireball in Lac-Mégantic, Quebec, which killed 47 people.

As I’ve written about before, Trinity Industries builds more oil tank railcars than anyone else in the country, so it might seem like this request for more time would hurt its bottom line. But as I also wrote previously, the company already has a huge backlog of orders. And it’s not like the trade groups are refusing to build new cars or retrofit existing ones. They’re simply seeking a few more years to do so. I hardly see how that constitutes a ‘disaster’ for Trinity.

I have interviewed Trinity’s management in Dallas twice at their headquarters since last Spring, and they are very confident about the outlook for their railcar division. In fact these retrofit requirements could boost their business, as many rail companies might prefer to order new tank cars altogether instead of spending the money to improve their existing fleets.

As long as oil production in the lower 48 continues to increase–and there is no indication it won’t–Trinity will benefit. The only real threat to its business is that the government will suddenly allow new pipelines to be built. That truly would be “disastrous” for Trinity, but given how politically unpopular pipelines are these days, nobody expects that to happen anytime soon. For the foreseeable future, the gushers of crude coming out of the Bakken formation in North Dakota and elsewhere will have to travel by rail, and the only way to make that happen safely is to retrofit old railcars or build new ones. Whether that process takes place over two or four or six years, I’m confident Trinity will continue to grow revenues at a double digit rate, beating both Wall Street estimates and the company’s own guidance.

Of course, I could be wrong and Mr. Cramer could be right. We’ll get a good initial idea in a few weeks. The company reports earnings on October 29th.


4 thoughts on “a bad day at the office

  1. Steve M

    I agree with your assessment – don’t see how potentially taking railcars out of service could hurt a manufacturer. This should also help with any potential oversupply situation for 30,000 gal tank cars. I believe the rates for these cars have come back to earth but think that the shippers like the ability that rail rather than pipeline gives them as well in added flexibility. I think potentially more worrying in the near term is a reduction in demand for crude oil, which could bring rates down or hurt demand for new tank cars.

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