In An Underwhelming Rail Supply Sector, Trinity Industries Is A Buy, Says Wells Fargo

The rail supply industry is stuck in a "somewhat meh" state, but Trinity Industries Inc TRN is an attractive buy, according to Wells Fargo.

The Analyst

Wells Fargo's Allison Poliniak-Cusic upgraded Trinity Industries from Market Perform to Outperform with a price target boosted from $40 to $53.

The Thesis

The rail supply industry isn't showing signs of strong growth, but it also isn't showing signs of weakness, Poliniak-Cusic said in a Thursday note. (See the analyst's track record here.) 

New orders over the past two quarters have stabilized, and leasing rates look to have bottomed and are now posting low but sequential improvements, the analyst said. Storage levels are "stubbornly elevated," and rail traffic is "less than impressive" and expectations for new rail car demand look "relatively muted" in the near-term, she said. 

Nevertheless, the case for buying Trinity Industries' stock can now be made for three reasons, the analyst said:

• The stock's recent pullback does not reflect the company's leasing value.
• Trinity boasts a "strong" liquidity position with $875 million in cash on hand.
• The company's exposure to inland barge, highway and energy bodes well in the 2018 infrastructure outlook.

Trinity said during its third-quarter earnings conference call that it may look to increase the leverage of its leasing business, which has a fleet loan-to-value ratio of 27 percent. Doing so would be supportive of the analyst's view of allocating new investment dollars into an already profitable business, she said. 

Price Action

Shares of Trinity Industries were trading higher by 2.5 percent Friday afternoon.

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