Thursday, September 12, 2013

Stock analysis: Textainer Group Holdings

Textainer Group Holdings Limited and its subsidiaries (“Textainer”) is the world's largest lessor of intermodal containers based on fleet size. The Company began operations in 1979 and as of the most recent quarter end had more than 1.9 million containers, representing more than 2.8 million TEU, in its owned and managed fleet. Textainer leases dry freight, refrigerated, and specialized containers. Each year the company is one of the largest purchasers of new containers as well as one of the largest sellers of used containers. Textainer leases containers to approximately 400 shipping lines and other lessees and sells containers to more than 1,000 customers worldwide and provides services worldwide via a network of regional and area offices, as well as independent depots. (Source: Financial Tear Sheet TGH, as of September 7)

Revenue and earnings growth
Since 2006 total revenue has grown at 14% CAGR. In the first 6 months of 2013 revenue has grown 9% compared to the first 6 months in 2012. Earnings Before Interest Tax Depreciation Amortization (EBITDA) has grown even faster in this period, about 20% CAGR.

According to TGH the container trade has grown roughly between 1.5 and 2.5x the growth in global GDP. Global growth in GDP is therefore one of the key determinants in the financial well being of TGH. If BRIC-countries are not contributing to GDP growth, that’s bad for business. Although economic indicators in US-markets are looking better, the Euro-zone is still lacking. Times are still uncertain but the advantage is that TGH can react quickly to changes in supply/demand conditions. TGH has been profitable for the last 27 years which shows consistent business performance.

TGH carries a significant amount of debt. The ratio of debt to equity has increased in recent years to 2.3 although this ratio has been quite stable over the last 6 quarters. This ratio is higher than I’d normally like, but the interest coverage ratio has been constant at 4-4.5x which is usually regarded as enough. The debt is used to increase assets (containers) and is not used to fund regular operations. Even so, I’d like to monitor these debt levels closely.

Cash-flow is negative in the last quarters. Even though cash from operations is positive and growing on a TTM-basis, the capital expenditures on new containers puts cash-flow in the red numbers. This money is raised by issuing long-term debt as mentioned above.

TGH has paid at least stable dividends for 24 consecutive years and has increased it on an annual basis since 7 years. It’s a dividend challenger on David Fish’ CCC-list. The stock currently yields 5.4%. Its 5-year DGR is 52% which is obviously quite high although the payout-ratio (based on EPS) is a respectable 47%.

Outstanding shares
The number of outstanding shares has increased from 49M in 2011 to 56M in 2013. I am not overly fond of this development since it dilutes the ownership of the company.

  • Price/sales-ratio: in the last 7 quarters the price to sale ratio has moved between an average bandwidth of 3.2 – 4.0x revenue per share. With the last quarter revenue per share (LTM) of $9.2 this puts the valuation of the company between $30 and $37 per share.
  • Price/earnings-ratio: in the last 7 quarters the price to sale ratio has moved between an average bandwidth of 7.6 – 9.5x earnings per share. With the last quarter earnings per share (LTM) of $3.77 this puts the valuation of the company between $28 and $36 per share. The PE-ratio has steadily increased in the last quarters, so compared to the end of 2011 the current stock price is relatively high.
  • Dividend yield: in the last 8 quarters the dividend yield has moved between an average bandwidth of 4.5 - 5.7%. With its latest quarterly dividend increase to $0.47 this puts the valuation of the company between $33 and $42 per share.
  • Dividend Discount Cash Flow-analysis: using an earnings growth rate of 6% for the next 10 years (conservative!) and half of that as perpetual growth thereafter, using a 10-year dividend growth rate of 12% and 3% as perpetual dividend growth rate, the estimated fair value of the stock is around $50 (considering a holding period of 30 years).

Textainer is growing revenues and earnings on a consistent basis. The properties of this dividend stock are great, high current yield and high dividend growth rate. Debt levels and the increase in outstanding shares need to be monitored but according to different valuation methods TGH seems to be fairly valued at this point. If you think that the global economy shows signs of recovery than TGH just might be a nice stock for you as a dividend growth investor.

What do you think of TGH? Do you like this company enough to add it to your portfolio?



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