A Top Steel Analyst Highlights Acute Risk To Trinity Industries' 2018 Operating Margin

Axiom said in a note there is acute downside risk to the Street's 2017-2018 operating margin estimates for Trinity Industries Inc TRN, going by its analysis of the past four U.S. rail industry down cycles.

Defining the onset of the prior four U.S. rail industry down cycles, as the time when peak backlog begins to move lower, the firm delineated the previous four downcycles as:

• Q1'95-Q1'97
• Q4'98-Q1'02
• Q3'06-Q4'09
• Q4'14-present

Making some observations concerning the previous two downturns, analyst Gordon Johnson said:

• The average cycle duration was 14 quarters, while the current downturn is only 10 quarters old.
• Beginning cycle industry backlog was up an average 35 percent off the prior cycle peak compared to 62 percent for the current down cycle. This lends credence to claims that the current down trends duration will break records.Beginning cycle industry orders were up an average 14 percent off the previous cycle peak compared to 74 percent for the current downturn.

Margins to Materially Disappoint

Based on the consensus estimates, Johnson said the U.S. rail industry margin will trough in the fourth quarter of 2017, with Trinity Industries' margin bottoming in the third quarter of 2017. The analyst believes margins of the rail industry as well as Trinity Industries will disappoint in a material way to the downside.

Based on Trinity Industries' guidance for car delivery, Axiom expects its rail industry utilization to fall from 75 percent in 2016 to 43 percent in 2017 and 18 percent in 2018. The firm expects the company's Rail Group EBIT margins declining to 6.4 percent in 2017 and -3.7 percent in 2018.

Consequently, the firm expects forward EBITDA estimates to come under pressure, weighing on the share price.

As such, Axiom has a Sell rating and $11 price target on shares of Trinity Industries.