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Axiom Slaps A Sell Rating On Trinity, Sees 'Sizeable' EBITDA/EPS Cuts

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  • Trinity Industries Inc (NYSE: TRN) shares have been trending lower in recent months and are down 14 percent since November 18.
  • Axiom’s Gordon L. Johnson II initiated coverage of the company with a Sell rating and a price target of $10.
  • Reduced demand for railcars and an increased railcar backlog indicate reduced earnings at Trinity, Johnson stated.

Trinity derives a significant part of its income from selling and leasing of railcars to various North American commodity market participants. Analyst Gordon Johnson believes that the company’s fundamentals are on the “precipice of a severe correction lower.”

He expects the deterioration in the company’s earnings to outpace that of GATX Corporation (NYSE: GMT) and other rail leasing companies since the pressure on the average selling price on cars sold is immediately reflected in Trinity’s Rail Group results.

The primary risks facing Trinity include: the largest upcycle in railcar backlog due to the abrupt ending of the US-energy/China commodity boom and deteriorating rail demand, significant capacity additions by the company to meet the demand for tank cars resulting in increased manufacturing expenses and a significant improvement in the performance of railcars along with the new regulations allowing railcars to stay in service until 2020.

Johnson noted that during the last downcycle of 2008-2009, the company cancelled 10K orders, which constituted 41.4 percent of its backlog. He added, “Thus, with our checks implying orders are already being cancelled, exacerbated by ~2K cars/qtr of orders in ’09 vs. ~9K cars/qtr in 4Q15 amidst near-record backlog, we see this as an “if” not “when” event.”

Latest Ratings for TRN

DateFirmActionFromTo
Mar 2019DowngradesBuyNeutral
Mar 2019DowngradesOverweightSector Weight
Nov 2018MaintainsOutperformOutperform

View More Analyst Ratings for TRN
View the Latest Analyst Ratings

Posted-In: axiom Gordon L. Johnson IIAnalyst Color Short Ideas Initiation Analyst Ratings Trading Ideas

 

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