Some bullish thoughts on TRTN as Q3 earnings pour in

This week has been a deluge of information for me as a ton of names in my portfolio or names I track have reported Q3 earnings (TRTN, MSFT, FB, IMAX, NOW, the list goes on). I expect to post a few times in the weeks to come as I digest the Qs and transcripts.

As TRTN is one of my largest positions, I did listen to the call live and came away impressed (press release, deck). The headline stuff alone is nice – the company increased the dividend 14% to an annualized $2.60 (4.3% yield at $60 stock price) and smashed EPS estimates ($2.43 v. $2.19). TRTN did 29%+ ROE over the course of the quarter and “expect[s] our net book value per share will increase rapidly due to our strong return on equity”.

I increased my position to the max 10% my personal PA risk limits allow over the course of this week and see a path to $100+ for the stock long term. The reason? The market 1) is waking up to TRTN’s return of capital story as capex slows down and 2) realizing this company could do $10+ in EPS for at least a few years in a bull case.

Return of Capital Story – TRTN Likes Shareholders

TRTN awarded shareholders with a nice dividend raise and even said its payout ratio is conservative. I recommend taking a look at the company’s dividend history and growth in tangible book value – they have a history of growing both for decades. As a shareholder, I completely trust management to grow the value of the company and make the right capital allocation decisions.

I know that they have locked in earnings for years to come due to originating 13+ year leases in the current insane shipping environment. What this means is there will be more capital to distribute for years to come (revenue generating assets have grown by 30% in the last year). I expect them in a strong shipping market to originate leases and a weak one to give money to shareholders. I am echoing the company when I say that:

We estimate that we need to spend between $825 million and $850 million on new containers each year as replacement capital spending. This leaves about $700 million of annualized steady-state cash flow before our regular dividend and roughly $525 million of annual equity cash flow after the dividend. The next set of numbers illustrate a few things we can do with this $525 million of cash flow that we have left after replacement capital spending in our dividend, all while maintaining a constant leverage ratio. If we focused on capital investment, we could self-fund the equity needed for nearly 20% asset growth. Alternatively, if we focused on share repurchases, we can repurchase almost 15% of our shares at the recent trading range. If we wanted instead to focus on dividends, we could pay almost another $8 per share on top of our regular dividend, bringing the total annual dividend to over $10 per share. We have typically pursued a mix of these options.

Here is the slide CEO Brian Sondey is talking about:

I love this slide for a ton of reasons, but an easy way to think about it is the company could give you a 14% return immediately in buybacks or dividends if they simply decided to stop spending non-maintenance (growth) capex. I don’t want them to stop growth capex as it is clearly generating higher earnings for years to come. I don’t think the logic in this slide is priced into the stock as it trades at <7x annualized earnings (and they said Q4 EPS will come in above Q3 and that they think they trade at a low P/E and buybacks are attractive).

TRTN is thinking clearly about how to spend each dollar coming in the door. I expect them to say more about this on their investor day on Nov. 17.

$10 EPS and More Is In the Cards and Gives Stock a Chance at $100

TRTN on an annualized basis starting with Q4 would do $10 in earnings for the four quarters including Q4 ahead (assume $2.50 next quarter, in line with the slightly higher guide company gave). In the Q&A, I was surprised to see Lawrence Solow from CJS Securities echo my thinking here:

If you read between the lines here my take is that Sondey is saying this isn’t unrealistic and to expect elevated earnings for years to come. We know the company can do a 14% buyback now, so earnings could go down by 14% and still be on track for $10 given the right amount of buybacks or dividends. This thinking you could extend – TRTN could see leases roll off and replace them with leases 25% worse, and buybacks of 25% of the float over the next five years would get them to $10 in EPS. At this earnings power, I feel like I have a margin of safety at the current stock price (6x at $10 EPS) and also think beyond $10 is a real possibility too.

In a case where the shipping crisis continues and buybacks add up, I could see TRTN reaching even ~$14 in EPS which at a conservative 7-8x earnings gets you to $100. I think they deserve a premium multiple as they are the strongest lessor in the space with the highest market share (30% now, they say they’re winning 40% of new deals and their competitive position has improved over the last year).

This is a great story with a conservative price. That’s all for now and looking forward to doing some more write-ups on Q3 earnings.