Railroad and shipping volumes have steadily been increasing throughout 2010 and this trend is expected to continue into 2011. Various market factors such as increased demand for raw and finished good from emerging economies as well comprehensive trade policy improvements will sustain constant demand growth for international transportation.
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Shipping companies heavily depend on leasing containers as a means of transporting materials across international borders. Global demand for containers grew by approximately 8.6% in 2010 and is expected to increase by 7.7% in 2011.
TGH Leads the Way
Textainer (NYSE:TGH) is currently the industry leader, with approximately 20% of the market share, in terms of total number of containers owned. Within the last year TGH has appreciated by nearly 100% as earnings have increased every year since 2006. Textainer has shown strong revenue growth within the past year, while slightly cutting down operating expenses. Since rental contracts are typically for terms of three to five years, the increase in revenues is likely to persist moving forward. Over the past year, cash used for investing activities has increased by 524.3% as additional units were purchased.
TAL International Group (NYSE:TAL) has also experienced a similar year-to-date stock performance as industry conditions improved through 2010. Adjusted net income surged by 140% while revenues increased by only 15%. Similar to many companies in the railway industry, container lessors are implementing a more efficient business model to improve their margins. Compared to 2008 when the TAL International operating margin was 34.8%, it has since improved by nearly 990 basis points. Like, TGH, TAL heavily relies on long term leases for continued revenue growth - currently 66.0% of its lease portfolio is based on long-term lease agreements.
Small but Steady
SeaCube Container Leasing (NYSE:BOX) is a much smaller player in the container leasing market. After completing an initial public offering on November 2, 2010, SeaCube has failed to gain the same type of momentum as some of its larger competitors. The company holds $16.24 million of cash (with an additional $17.36 million in restricted cash) but has a total debt of $787.1 million, $148.2 of which is due within the next year.
Furthermore, many of its lease contracts will be expiring within the next five years, thus the future minimum lease revenue is estimate to fall from $53 million in 2011 to $12.9 million in 2014. BOX experienced an 8% decline in their top line for the nine months ended in September 30, 2010.
CAI International (NYSE:CAP), a small cap container operator and manager has appreciated by over 100% in 2010. CAI International leases intermodal containers to shipping, trucking and rail companies in a much small capacity than Textainer. The year-over-year income statement improvements appear very similar to that of the TAL and TGH; however, for a company of it size, CAP appears to be expanding its asset base at a faster rate. Textainer spend $181 million on the purchase of containers and fixed assets while CAI spent $104 million on containers. Given that Textainer has three times as many total assets and a market cap almost five times that of CAI International, the latter firm is making greater efforts to expand its operations.
The Bottom Line
Despite that smaller companies, if successful, are able to achieve faster growth rates, extensive entry barriers into this industry in the form of large capital expenditure requirements to purchase containers suggest that the larger firms are a superior investment. Nonetheless, the container leasing business has clearly outperformed the general S&P 500 index as measured by the SPDR S&P 500 ETF (NYSE:SPY) and the transportation index as measured by the iShares Dow Jones Transport Average ETF (NYSE:IYE). (For more stock analysis, see Transportation Growth Strengthens CP Railway.)
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