back on track: has trinity turned a corner?

(note: this post originally appeared on my Yahoo! Finance contributor page)

One of my favorite stocks went off the rails a few months ago. After chugging steadily higher and nearly doubling in the first nine months of 2014, railcar manufacturer Trinity Industries (ticker: TRN) went into the ditch—see what I did there?—as one piece of bad news after another hit the company.

T.S. Eliot said April is the cruelest month. He obviously didn’t live through last October as a Trinity shareholder.

The month kicked off with a thud when Mad Money host Jim Cramer called a lobbying effort to delay implementation of new railcar standards “disastrous” for Trinity’s stock. TRN promptly tanked almost 10 percent in a single day. (Thanks, Jim!) Then a Texas jury slapped the company’s construction group with a $525 million penalty over allegedly defective guardrails. Oh yeah, the price of oil cratered right around then, too, causing investors to quickly shed all things even remotely energy-related. Trinity builds and leases tank cars that haul a lot of crude, so its stock took the same plunge as oil prices.

By the time that awful October finally ended, TRN had given back almost all of its recent gains—and things only got worse. The stock finished flat for the year and rang in 2015 with consistently new 52-week lows. In four short months, Trinity went from being one of the biggest winners in my fund to one of my biggest headaches.

In my book, Dead Companies Walking, I talk about the importance of being a good quitter in the investment business. Usually when a stock freefalls like Trinity’s did, I make for the exits without a second thought. But I couldn’t quite bring myself to unload all of my TRN—and I’m glad I didn’t. As grim as it got last fall for the company, things are looking up these days. I even bought more shares last week.

First, the crushing headline risk TRN has endured is finally starting to abate. The press, particularly the New York Times, has hammered Trinity over the guardrail lawsuit, all but saying outright that the company knowingly sold a dangerously deficient product. But news broke last week that Trinity’s “EZ Plus” guardrail cap passed court-ordered federal safety tests with flying colors. Those results could help lower (or overturn) the original damage award on appeal. This week, the Wall Street Journal brought some balance to the coverage of the lawsuit by reporting on the whistle-blower in the case. He owns a competing guardrail company that he recently took into bankruptcy.

Second, even if oil prices stay depressed for the near future, Trinity is going to continue to haul in trainloads of cash (sorry, I can’t help myself). New railcar orders could cease today and the company would still be sitting on a $7.2 BILLION backlog. Bears like Cramer claim that we could see a glut in railcars as the industry rushes to meet demand. But rail is still the cheapest way to transport goods across America, and unless the political climate shifts radically in favor of more pipeline construction, it will remain the only way to deliver crude from places like the Bakken Shale. More than a million barrels a day are coming up out of that formation now, and while output and new exploration will slow until prices rise again, production companies are still going to have to get massive amounts of their product to refiners. Whether that product ships in older tank cars or newer, more robust models, Trinity will thrive.

Not surprisingly, Trinity’s stock has rebounded nicely in recent weeks. It’s up more than 10 points from its mid-January nadir. I am cautiously optimistic that the good times are just beginning. Its forward PE is still hovering close to 8x. As the negative vibes of late-2014 continue to wane, that number should creep higher. Analysts only expect the company to earn $4.30 a share in 2015 and $4 in 2016. Those are quite modest (and beatable) estimates, in my opinion. They tell me that Wall Street continues to view Trinity as a cyclical manufacturer, not a beneficiary of the secular trends of growing domestic shale oil production and market share gains by railroads. I believe those secular shifts will carry forward, and if Trinity rides them to positive earnings surprises in 2016 vs. 2015, its stock should approach a market multiple. At 15x $4.50 in 2016 EPS, TRN would hit $67.50, almost double today’s price. That means anyone worrying that they might have missed out on Trinity’s recent rally should still consider climbing on board. It could be a fun ride.

5 thoughts on “back on track: has trinity turned a corner?

  1. Rob

    Hi Scott. Where did you work between graduate school and founding your hedge fund that gave you the practical knowledge to run a HF? Thanks.

    1. scott fearon Post author

      Thanks for your question Rob–and thanks for reading the blog. I worked at the largest bank in Houston and then ran mutual funds for a firm in San Francisco. You can find out the details in my book, if you’d like to know more.

        1. Rob Munsie

          Scott, the only reason I asked about TCB was because like any money management firm we always have CNBC on in the background. When I heard the commentator say “next up Scott Fearon” I had a flash-back to a Scott Fearon I covered from First Manhattan and LF Rothschild in the mid-’80’s. When I read the sample page of your book on Amazon it took place in Houston so I began to think it could be the same Scott Fearon. Anyways, on the off chance you recall the name, “hi 30 years later”! Ha! If not, congrats on the book.


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