Gordon Johnson: Sell Trinity As 'Rear-View Catalysts' Fade

The Street had only good things to say about Trinity Industries Inc TRN.

That is, until Tuesday. The rail company earned its only bearish rating diluting seven Buys.

The Rating

Vertical Group analyst Gordon Johnson initiated coverage on Trinity Industries with a Sell rating and $20 price target.

The Thesis

Trinity is up nearly 25 percent year-over-year, but Johnson attributes that to a reversal in a previously negative trial verdict; a rally in oil prices; the company’s pending split into rail and infrastructure businesses; positive sentiment around corporate tax reform and infrastructure plans; and intended use of capital toward share repurchases, dividends and mergers.

But these “rear-view catalysts” do little to buffer margin headwinds, the analyst said. 

“We believe the U.S. rail leasing industry faces a structural problem of excessive railcar production against a backdrop of ‘struggling’ car loadings,” Johnson said in the initiation note. 

Trinity’s guidance for margins declines, coupled with improvement in its lower-margin third-party managed fleet segment, reinforced Johnson’s bearishness. By his assessment, Trinity margins have not troughed as other analysts have suggested.

Looking forward, Johnson said he expects continuing flat demand to pressure leasing rates and challenge Trinity’s ability to sell railcars to external entities.

Price Action

Trinity Industries shares were up 0.48 percent at $33.70 after the open Tuesday. 

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