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Monday, July 04, 2011

Container Leasing: TAL vs CAI

"Despite what they say, I see they handle reefers."

Looking at two container companies.  I've followed the container industry due to CFRI.  World Cargo News is the source of info in the industry.  I've learned a lot just by reading the headlines for the last 4 years or so.

TAL International Group (sec)

CAI International (sec)

Quarter Ending March 31, 2011

CAI 10-Q
TAL 10-Q

CAI has $647 million net container rental equipment, which grew 22% from last year, about 12% depreciated
TAL has $2.4 billion, which grew about 10% from last year, roughly 20% depreciated

CAI has $212 million in equity
TAL has $448 million in equity (twice as leveraged, equity / rental assets)

Nearly all of CAI's revenue comes from container rentals, with some management fees and some gain on sale.
TAL is also mostly container rentals, but also some equipment trading revenue.

CAI: $27.7 million in revenue, 4.2% of net rental assets
TAL: $125 million in revenue, 5.1% of net rental assets
This makes some sense considering TAL's equipment is more depreciated.

Both had significant gain on sale from assets (6.3% of revenues for TAL, 13% for CAI)
TAL had a large gain on interest rate swaps.  It's difficult to know whether to back this out for comparison reasons (might be offsetting a hidden loss somewhere else).

TAL: 53% operating margin (46% without gain-on-sale)
CAI: 67% operating margin (54% without gain-on-sale)
Wow, the container business is good, at least this particular quarter.  Based on World Cargo News, I didn't think that was all THAT great of a quarter for container leasing companies.  It was certainly bad in 2010 and 2009.

TAL: 26% net margin  (interest is about 19% of revenues, tax about 14%)
CAI:  47% net margin!!!  (tax and interest are each about 11% of revenues)

I'll need to go back and look at the really bad quarters to see how each company survived.

TAL is currently selling for about 34 times this quarter's earnings
CAI is currently selling for about 32 times this quarter's earnings
I imagine the business is somewhat seasonal, so trying to guess a P/E is tough.

Cash Flow:
Can't really read much into TAL's operating cash flows.  There's a lot going on.  Depreciation was the same amount as net income!  This is a capital intensive business.  They bought almost 4 times as much leasing equipment as was depreciated, which matches the growth I saw in assets.  Lots of finance churn.

For CAI, depreciation was only half of net income (need to think about this).  CAI is also buying up a lot of containers (an even larger percentage).

CAI: founded 1989.  Focuses on dry freight standard containers.  Went public in 2007.  International leasing goes through a Barbados subsidiary they created in 2008.  Despite what they say, I see they handle reefers.

TAL also focuses on dry freight, with some reefers and other containers tossed in.

CAI's CEO and CFO are retiring.  New ones have been appointed.

TAL has 1.44 million TEUs owned and managed. (Twenty-foot Equivalent Units = TEU)
CAI has 0.863 million TEUs owned and managed (much higher ratio being managed)

2010 Year
CAI 10-K
TAL 10-K

Revenues:  TAL, CAI (in millions of dollars)
2006: 273,  34.6
2007: 286,  38.1
2008: 319,  56.4
2009: 309,  53.7  (that wasn't so bad)
2010: 329,  64.9

Net income:  TAL, CAI (in millions of dollars)
2006: 42.1,  15.7
2007: 38.8,  19.0
2008: 35.8,  (27.1) CAI massive impairment of goodwill (tide goes out, see who's swimming naked)
2009: 71.6,  13.6
2010: 57.7,  28.2 what's the story with CAI here?

The big story here is the long term intermodal growth that I've clearly seen watching World Cargo News headlines.

Ok, so what happened with TAL, first.  Why were earnings falling in 2006-2008 while revenues were climbing so fast?  Equipment trading expenses seems like the answer.  Admin expenses went up a lot, but about what I'd expect.  If it wasn't for the climb in net gain on sale of leasing equipment, it would've been worse.  Also there's a big loss on interest rate swap, but that shouldn't have stood out if it was just a hedge (that't the whole point with hedging).


It's possible that TAL is worth something like $50 a share, given my expectations of long-term global growth and assuming TAL isn't doing anything stupid.  For CAI, maybe it would be $35, that's without looking at more details.

Needs more work.

UPDATE July 8, 2011:  World Cargo News has an article about the boom for container lessors.
Textainer Group Holdings, the world’s largest container lessor by fleet size, reported total revenue for the first quarter ended March 31, 2011 of US$91.2M, an increase of US$21.6M, or 31%, over the 1Q 2010 figure.
I should scan through Textainer Group's financial statements (sec), a Bermuda company.

Also SeaCube Container Leasing Ltd. (sec), they focus heavily on reefers (about half of book value of containers, they're the largest lessor).  Their revenues seem to have gotten a lot more clobbered by the downturn.

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