Is Trinity Chugging On?


Rail car, barges, and construction products manufacturer Trinity Industries (NYS: TRN) just produced a second quarter that saw the bottom line shoot up by 63% driven by higher segmental revenues.

In spite of this, the stock tanked 11%, as the numbers and next-quarter forecast missed Street estimates. Did the market just overreact? Or do the numbers smell of caution? Let's see.

The numbers
Total revenues jumped 31% from the year-ago period to $710.5 million. The Rail group contributed almost 40%, as increased shipments and orders helped revenues grow from $112.9 million in the quarter last year to $280.7 million. The segment's backlog -- a future business indicator, rose from $1.8 billion to $2.2 billion in the quarter, while operating income turned-around from a loss of $2.7 million last year to a profit of $15.4 million.

Shipment and backlogs also rose for other railroad companies like American Railcar (NAS: ARII) and FreightCar America (NAS: RAIL) in the second quarter, signaling evidence of a growing industrywide trend.

Trinity's Inland Barge group was hit by flooding, costing the company around $8.4 million. In spite of this, operating income went up to $19.1 million from $12 million last year. Energy Equipment and Construction Products groups were the dampeners, with margins falling in both. One point worth noting is that the Energy segment fared badly owing to some productivity and product mix inefficiencies within the company.

Overall, a higher top line boosted a net income surge from $18.4 million in the year-ago period to $30 million. EPS as a result was higher at $0.39, up from $0.23 in the same quarter last year.

Trinity's total debt to equity stands relatively high at 152.3%. Though the interest coverage ratio has improved from 1.7 times in Q2 last year to 2.2 times, the total cash has dropped from $435.3 million to $299.1 million. Unlevered FCF has also remained in the negative in both the second quarter of last year as well as the first quarter this year. To top it all, Trinity's total debt stands at $2.9 billion, more than its current market capitalization! Certainly not very impressive, but not altogether unusual for a company in this business.

According to Railway Supply Institute, the North American railcar industry witnessed a significant drop in new railway freight car orders from 36,903 in the first quarter to 16,900 in the second quarter. This may sound dismal, but considering that the figure is three times more than it was in Q2 last year, and that freight revenues have been growing for most railroad companies like Union Pacific (NYS: UNP) , it does leave us with a somewhat optimistic outlook of Trinity's business in the future

Trinity's forthcoming months, however, are not looking so positive. Its second half could be affected by various factors like product mix alterations, weather conditions, and normalizing production in the flood-hit plants. Moreover, the management feels revving up efficiency to meet new orders a challenge. Accordingly, it has softened its full year EPS guidance to a range of $1.35 to $1.45, much below expectations. Ouch.

The Foolish bottom line
Trinity's quarterly net income CAGR over three and five years is negative. If we add the management concerns and tepid outlook to it, this "trinity" of factors may be reasons not to jump on this train yet.

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published