CAI International (NYSE: CAP) has been on one impressive run. I talked about it last year when it was at $20 or below. Now it is pushing $27, and the stock will makes some impressive gains. I wanted to touch on the stock and some related companies again to see if there is more upside to come. Rather than being coy, I will say that there is plenty of upside possible for CAP and related stocks. The global economy is not firing on all cylinders yet. It is recovering but slowly. We are not at the peak of this cycle, and these companies can benefit from further recovery and growth of the global economy.
Intermodal Contains For The Win
Image may be NSFW.
Clik here to view.
CAP International is a company that deals in many aspects of the intermodal container business, including buying, selling, leasing, managing, and maintaining. Intermodal containers are those metal boxes that almost killed the A-Team in the modern movie. They store goods of all kinds and are by far the most common way to ship large amounts of dry goods.
CAP is one of those companies that invites an exception to my rule about cash and debt. CAP has less than $20M in cash, and almost $1B in debt. The debt-to-equity ratio is around 2.7. The company deals almost entirely with hard assets in the form of intermodal containers. These have a 20-year life, but depreciation rules will usually reduce the book value of those far sooner. The reason to do that would be to get the tax benefits of deprecation, which is a non-cash expense that helps reduce tax liability.
The result of all this is that there are assets on the books that are worth nothing, no equity, yet still generate income. This is just an inference from the tax classes I have taken in school, I do not know if CAP uses straight line depreciation or double declining balance. The latter would be my guess, because it is the most common. Anything but straight-line would reduce an asset to no value before its effective life was over. Hence the reason for my somewhat perplexing retreat from despising companies with low cash and high debt.
CAP also has almost 35% in net margins, consistent profitability, and a PE ratio that is below peers. Most of the other intermodal companies have PE ratios at 10 or above. That means CAP still has some more room to run before it catches up. Despite the impressive run of recent days it has further to go, and that is just fantastic.
The recent earnings announcement explained some recent expansions that the company completed. It is not uncommon for CAP to buy the assets that it manages from investment portfolios. I see news like this fairly often, though some are small-scale deals. The company already has the containers from the most recent acquisition, which added to debt, in long-term leasing agreements. That means they will provide revenue and cash flow immediately. The company also projects and increase in the use of intermodal containers for 2013, 6% vs. 4% in 2012. That means CAP is not the only company in the bunch to benefit.
Small companies are favored by me, but if you are someone that prefers owning companies with at least $1B in market capitalization there is another container company that comes with benefits that could assuage the limitation of owning a larger company.
TAL International (NYSE: TAL) had great results for 2012, and increased its dividend further. It now yields around 6%, though if the stock rises that will go down until management increases the dividend again. The company has some of the same features as CAP. It has a debt-to-equity ratio above 4 and has over $200M in cash. This is again due to some of the containers on their books having zero value, but still bringing in money.
TAL has gross margins of over 80%, and net margins of around 25%. Net margins are lower than CAP, and it would be interesting to see if the company enacts some cost cuts and controls to fatten net margins. The company is reporting fantastic profits even without the higher net margins, so it probably is not a major issue for them. TAL is the company to go with if you are looking for regular income because 6% is phenomenal especially with an improving industry outlook. Its PE is around 11, so it would not be undervalued compared to peers like CAP, but earnings are expected to grow as trade increases. CAP is the choice if you are looking for some capital appreciation. CAP is small right now, but TAL is a guide to where it might go in the future. I expect CAP to have a dividend eventually.
Container Transport for a Shot of Diversity
A stock near and dear to my heart is Seaspan Corp. (NYSE: SSW) with its fantastic dividend yield over 5%, and its commitment to increasing that when possible. Seaspan owns the huge ships that intermodal containers are transported on. These ships are contracted out on charters that can vary in length of time. Seaspan has traditionally tried for longer term contracts, which helped them get through the decline in global shipping intact.
Seaspan is a company with a crazy high PE of around 70, which is in line with its own history. It also expands its fleet regularly, which accounts for its large debt load. The company’s debt is not a concern if it can keep its ships plying the seas and making money, which has been a recent issue. The company has positive net income now, but not always. With the return to profitability the company has seen its price rise from the $15 area to the current $19. Earnings are soon it is currently March 4th for this article, while earnings are March 6. If its forward guidance points to increased profits the price could rise further. Until it does, enjoy the dividend. I will follow up on Seaspan and its ilk soon, but Seaspan is my current favorite if you are looking for diversity in trade shipping.
The post CAI International Has Been in Beast Mode appeared first on The Market Archive.