TAL International (TAL) is a boring stock that could produce exciting returns. It leases shipping containers for intermodal transport. Customers include global freight shippers like APL-NOL(SGX:NO3), Mediterranean Shipping Company, and NYK Line(TYO: 9101) that may not have prospered in the recent slowdown.
TAL International, though, is doing very well. Sales are rising, and earnings, though depressed, are beating estimates. The company has been raising its dividend as its fortunes improved, and lately the stock has been rising as well.
According to Bloomberg Businessweek, TAL operates in two segments, Equipment Leasing and Equipment Trading. At the end of 2011, TAL held 1,009,644 containers and chassis, which included 26,491 containers it was managing for other owners.
The Equipment Leasing division acquires and leases or sells intermodal shipping containers, the kind that travel by train, truck, and ship. It deals in ordinary containers, refrigerated containers, and tank containers that carry liquids. It also handles chassis that support containers during land transport, and special containers for oversized or especially heavy goods. TAL leases containers under long term leases, finance leases, and services leases, and is paid on a per diem basis.
The Equipment Trading segment buys used containers, also according to Bloomberg Busnessweek. It resells them to one-way shippers, to users needing storage facilities, or to other container traders. Ultimately, TAL containers may find an end use that does not involve freight, becoming part of a vacation cabin or a trendy pop-up store.
At the end of 2011, TAL operated its business through 17 offices in 11 countries. It controls a global sales force, a container operations group, an equipment resale group, and a logistics services group.
One problem for TAL might be competition. San Francisco based CAI International (CAP) is slightly smaller. COSCO Pacific (1199:HK) is a Red Chip company that’s listed on the Hong Kong exchange. It may benefit from lighter regulation than TAL faces at its headquarters in Purchase New York. Seacube Container Leasing Ltd. (BOX) is a similar enterprise based in Park Ridge, New Jersey. Textainer Group Holdings (TGH), the world’s largest lessor, has headquarters in Hamilton, Bermuda.
Barriers to entry are not high in the container shipping field, another problem for TAL International. A shipping container is essentially a rectangular metal box with doors at the end. Even a special container that stores liquid chemicals is simply a stainless steel vat mounted inside a rectangular container of standard dimension. Not much expertise goes into a shipping container, to all appearances.
Finally, when marine shippers stumble, TAL might fall. Its business is leveraged to that of the shippers, who in turn may depend on the state of the global economy and the price of commodities. On the other hand, TAL uses long term leases to decrease fluctuations in its profits.
On the bright side, in the reported results for the fourth quarter, ended December 31, 2011, TAL points out that it, “Does not currently pay any material cash taxes and does not expect that it will for the next several years.” Accelerated cash depreciation on the current fleet of containers, and anticipated future purchases of equipment account for the company’s tax freedom.
The company declared a dividend of $0.55 on earnings of $1.57 per fully diluted share, “An increase of an increase of 0.6% from the third quarter and an increase of nearly 34% from the fourth quarter of 2010.” That would amount to a dividend of 5.6%, if payouts continue at that rate, on a current stock price of $39.00. The volatile stock has been rising, up more than fifty percent from the October low.
According to Brian M. Sondey, President and CEO of TAL International, “In 2011, TAL generated $6.04 of Adjusted pretax income per fully diluted common share and invested nearly $775 million in our container fleet. The high level of investment led to 25% growth in our revenue earning assets and has helped TAL build a strong platform for future profitability since the vast majority of containers added to our fleet were placed on multi-year, long-term leases with the world’s largest shipping lines.”
It sounds as if TAL International uses long term leases to lock in profitable rates from global shippers when tight supplies swing rates in the company’s favor. “Our strong performance in 2011 was supported by attractive market fundamentals. The supply / demand balance for containers was exceptionally tight at the beginning of the year, following the extreme container shortage that developed as trade volumes recovered in 2010; and the supply of containers remained tight throughout 2011 due to solid containerized trade growth, high new container prices and a reluctance of many of our shipping line customers to purchase new containers directly due to financial constraints. In this environment, we were able to maintain very high utilization, increase our average lease rates, and benefit from exceptionally high used container sale prices and disposal gains.”
Discussing the outlook, Mr. Sondey said, “Looking forward, we currently expect many of the market conditions which supported our strong performance in 2011 to continue this year.”
However, he remains cautious on some fronts, “The main risks we see to our positive expectations for this year include a renewed severe global recession and the potential for a major customer default. We don’t currently consider either of these events likely, but we are wary of a variety of potential event risks for 2012 due to the current high level of uncertainty in the global economy and the significant financial pressures facing our customers.”
Right now, TAL International seems to be at the sweet spot. Its customers need shipping containers for their growing business, but are not yet confident enough to buy them. TAL provides leased containers, and locks in a tidy profit. For investors, TAL International could be a useful way to profit from a cautious and shaky recovery.