Trinity Industries (TRN) - Railcar Backlog Increases in 3Q10, Better Earnings Leverage Ahead

The below bullish call on Trinity Industries TRN was originally published exclusively to premium readers of The Thematic Investor on 10-28 at 10:30 am. Since that time, the stock has risen over 12%, whereas the S&P 500 only rose by 4%. This is another big win for subscribers of the The Thematic Investor. The Thematic Investor Call - Trinity Industries (TRN - 23.25). Dallas, Texas, based Trinity Industries is a multi-industry company that owns a variety of businesses that provide products and services to the industrial, energy, transportation, and construction sectors. I recommended the shares in late September at $20.82 as the company and its shares are poised to benefit from the next up-cycle for railcar demand in the coming quarters. Earlier this week, Railway Supply Institute reported strengthening industry order levels and improved backlog levels, which bolsters my case for TRN shares. Also, this week Trinity reported better than expected September quarter results and a higher backlog position compared to the June quarter. Trinity has historically demonstrated significant earnings leverage during the up cycle for rail car demand. Based on historic multiples, I see Trinity shares worth $40, with modest downside from current levels. Background 3Q10 industry freight car orders and backlog jump. Earlier this week the Railway Supply Institute released third quarter industry data that showed a sequential strengthening in orders, deliveries and backlog. Industry orders rose to 9,194 car - the strongest level in at least the two past years, while deliveries rose modestly sequentially, given low production schedules. The result was a jump in the industry backlog level to 19,267 freight cars - the highest level in the last four quarters. With rail traffic up nicely year to date, and expanding capital spending at rail operators, such a CSX Corp. (CSX), prospects for further order and backlog growth remain bright, which bodes well for rising production levels, not to mention incremental margins and EPS. Trinity Industries reports better than expected September quarter results. Also this week, Trinity released its operating performance for 3Q10, and its trend of beating Street expectations continued. While the company beat Street consensus expectations, the quarter-over-quarter improvement in its rail car backlog sets the stage for further sequential improvement in coming quarters. Trinity exited September with 4,860 railcars in its backlog, valued at $388 million, vs. 3,990 railcars at the end of June, which equaled to roughly $300 million. Not only did the backlog grow 22% in the last three months, but the average price per railcar also rose 6%. While some of that may be attributed to the mix of railcars, increasing industry orders and rising backlogs also tends to result in firmer pricing. This tends to translate into more favorable margins down the line. American Railcar Industries sees improved backlog as well. While shares of ARII did not fair as well this week as the company missed Street expectations for 3Q10, the company did see some lift in its railcar backlog to 1,420 cars, up some 17% from 2Q10. We would note the share loss at American Railcar as its backlog growth lagged the overall industry. Nonetheless, I see the improved backlog and firming railcar pricing levels as a good sign for the industry and overall vendor margin prospects in the coming quarters. Do you want to see a return that is 8% higher than the S&P 500? Then you should subscribe to The Thematic Investor and get these same calls from Chris Versace.