These Stocks Might Ship Your Portfolio to the Next Level
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
CAI International (NYSE: CAP) has been on an impressive run. I talked about it last year when it was at $20 or below. Now it is pushing $29, and the stock might record some impressive gains in the future. I wanted to touch on the stock and some related companies again to see if there is more upside to come.
Rather than being coy, I will say that there is plenty of upside possible for CAI and related stocks. The global economy is not firing on all cylinders yet. It is recovering, but slowly. We are not at the peak of this cycle, and these companies can benefit from further recovery and growth of the global economy.
Intermodal contains for the win
CAI International is a company that deals in many aspects of the intermodal container business, including buying, selling, leasing, managing, and maintaining. Intermodal containers are those metal boxes that almost killed the A-Team in the modern movie. They store goods of all kinds, and are by far the most common way to ship large amounts of dry goods.
CAI is one of those companies which invite an exception to my rule about cash and debt. CAI has less than $20 million in cash, and almost $1 billion in debt. The debt-to-equity ratio is around 2.7. The company deals almost entirely with hard assets in the form of intermodal containers. These have a 20-year life, but depreciation rules will usually reduce the book value of those far sooner. The reason to do that would be to get the tax benefits of depreciation, which is a non-cash expense that helps reduce tax liability. The result of all this is that there are assets on the books that are worth nothing, no equity, yet still generate income. Hence, the reason for my somewhat perplexing retreat from despising companies with low cash and high debt.
CAI also has almost 35% in net margin, consistent profitability, and a PE ratio that is below peers. Most of the other intermodal companies have PE ratios at 10 or above. That means CAI still has some more room to run before it catches up. Despite the impressive run of recent days, it has further to go and that is just fantastic.
The recent earnings announcement explained some recent expansions that the company completed. It is not uncommon for CAI to buy the assets that it manages from investment portfolios. I see news like this fairly often, though some are small-scale deals. The company already has the containers from the most recent acquisition, which added to debt, in long-term leasing agreements.
That means they will provide revenue and cash flow immediately. The company also projects and increase in the use of intermodal containers for 2013, 6% vs. 4% in 2012. That means CAI is not the only company in the bunch to benefit.
TAL International (NYSE: TAL) posted great results for 2012, and increased its dividend further. It now yields around 6%. The company has some of the same features as CAI. It has a debt-to-equity ratio above 4, and has over $200M in cash. This is again due to some of the containers on their books having zero value, but still bringing in money.
TAL has gross margin of over 80%, and net margin of around 25%. Net margin is lower than CAI, and it would be interesting to see if the company enacts some cost cuts and controls to fatten net margins. The company is reporting fantastic profits even without the higher net margins, so it probably is not a major issue for them.
TAL is the company to go with if you are looking for regular income, because a 6% dividend yield is phenomenal, especially with an improving industry outlook. Its PE is around 11, so it would not be undervalued compared to peers like CAI, but earnings are expected to grow as trade increases. CAI is the choice if you are looking for some capital appreciation. CAI is small right now, but TAL is a guide to where it might go in the future.
Container transport for a shot of diversity
A stock near and dear to my heart is Seaspan (NYSE: SSW) with a fantastic dividend yield of 5%, and a commitment to increase that when possible. It just increased the 1Q2013 dividend to 0.3125. Seaspan owns the huge ships that intermodal containers are transported on. These ships are contracted out on charters that can vary in length of time. Seaspan has traditionally tried for longer-term contracts, which helped them get through the decline in global shipping.
Seaspan is a company with a high PE of around 74, but its history shows that it tends to have a higher PE. It also expands its fleet regularly, which accounts for its large debt load. The company's debt is not a concern if it can keep its ships plying the seas and make money. The latest earnings call said that while it continues to have charter contracts, the pricing environment remains weak.
With the return to profitability, the company has seen its price rise from the $15 area to the current $20. For 2013, the company expects container trade growth to increase 7% overall, which should keep Seaspan's ships a little busier than in 2012. There was no guidance regarding price trends. Lower Asia-Europe trade was cited as a reason for some of the weakness in 4Q2012. An increase in trade volumes should help the company, especially with it planning on taking delivery of more ships.
CAI and Seaspan seem like a great combination for an exposure to shipping. CAI provides the containers, while Seaspan provides the shipping. Since CAI trades slightly below its peers despite having great numbers, it gives you the best chance for near-term gains. Seaspan is a perrenial favorite of mine, and recent results were a bit soft. That could present a nice opening for anyone who wants to go long, as 2013 seems like it will be a better year. In general, the global economy is improving and all three companies should see a benefit.
TheArchivist has no position in any stocks mentioned. The Motley Fool recommends Seaspan. The Motley Fool owns shares of Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!