Triton International: Did you miss the rally? Don’t worry, there’s plenty of upside left (NYSE:TRTN)


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Since we initially went to Long on Triton (TRTN) last May, we have used stock as an overlooked and undervalued vehicle to capitalize on current supply chain challenges and high leverage from which industry players benefit, in particular dry bulk carriers, container ships and container lessors.

After exceptional sequential growth and record profitability during this period, the stock has rewarded us with strong total returns, including a rising share price and rising dividends.

On Tuesday, the company released its fourth quarter results, posting another quarter of record net profit, expanding capital returns and a well-positioned fleet profile that should continue to produce record financial data going forward.

With the stock becoming increasingly cheap to continue ignoring, Triton shares gained around 10% on the same day, continuing their gradual ascent.

Triton share price

Triton stock price (Triton stock price)

Source: Alpha Research

For those who have stayed away over the past year, a reasonable concern might be that the stock’s prolonged rally has limited Triton’s current rise. However, we believe this is hardly the case. In fact, we believe Triton has significant upside potential ahead of it, and the stock remains significantly undervalued.

What we are looking at today are the following points

  1. Take a look at Triton’s fourth quarter results and what’s happening in the industry right now.
  2. Examine Triton’s current capital return profile.
  3. Naming a reasonable valuation multiple for Triton stock (updated PT.)

So let’s put everything in order…

Recent developments, fourth quarter results, the market

Triton’s fourth quarter results are once again in line with our expectations. Revenue rose 23.7% to $417.1 million, while adjusted net income was $177.5 million or $2.67 per diluted share. This implies a 57% year-over-year increase and a 9.8% sequential increase.

Triton Earnings

Triton Revenue (Triton Revenue Report)

Source: Revenue Report

A sharp increase in the consumption of goods, particularly in the United States, has led to strong growth in trade, while widespread logistics bottlenecks have delayed container turnaround times, driving additional demand for containers. Additionally, fixed vessel capacity has contributed to a significant increase in freight rates and kept Triton’s customers highly focused on container availability. As a result, prices for new containers reached new records and very high rental rates in the market, which enabled Triton to achieve another quarter of record performance.

Remember that Triton placed $3.6 billion worth of container orders, which expanded its asset base by 30% in 2021. In fact, management estimates that Triton made a share 40% of all new rental transactions during the year, cementing Triton’s position as the “go-to” provider in the container rental industry

Propelled by record leasing margins and cheap financing, Triton recorded an annualized ROE of 30.7% in the fourth quarter, improving even further from last quarter’s already impressive 29.4%.

What is going on?

I’m sure you’ve heard of the current supply chain crisis a million times. And while we sometimes see analysts, executives and industry experts say the situation is improving, container ship TCE rates remain at record highs. In fact, they continue to rise!

TCE tariffs

TCE tariffs (VHBS)

Source: VHBS

As a result, this has not only helped container lessors such as Triton, but container lessors themselves are unable to meet the underlying demand for containers. Along with the rest of the world, they’re also battling to get their hands on their orders, which in this case are more new containers.

You can clearly see the consequences of the current market situation in the following charts provided by the company. In short, consumption remains at near-record levels in the United States, and as importers continue to struggle to meet this demand, the result is a lasting supply chain obstruction, which further impacts on stock replenishment.

Presentation to investors of Triton

Market Outlook (Investor Presentation / Seeking Alpha)

Source: Investor Presentation

As the graph below right illustrates, despite the so-called easing situation at ports, there are still near-record numbers of container ships lingering off the west coast of the United States to unload their cargo. In other words, there are not enough vessels, containers, trucks and chassis available to meet the underlying demand, which, combined with the scarcity of labor in the construction sites, terminals and rail networks, has an additional impact on the overall logistical obstacles.

To dive a little deeper, take a look at the left chart below. It displays the annual production of containers divided in percentage between the leasing companies and the shipping companies.

As you can see, shipping companies have increased their share in 2021 due to the high return on investment they can gradually realize on containers these days.

On the right, you can see the inventory of the container factory and the stocks of the depot. Indeed, an easing of container shortages has occurred. However, while container factory inventories have somewhat returned to “normal”, they still represent only 2% of the global container fleet available. Also, as shown in the graph on the lower right, there are no deposit units available. Again, the supply chain situation remains very tight.

Supply Constraints

Supply Constraints (Investor Presentation / Alpha Research)

Source: Investor Presentation

This should indicate that record rental rates should continue for Triton. Fortunately, we don’t have to speculate. Triton has made all the necessary preparations to take full advantage of the current supply chain turmoil. The leases signed on the containers newly acquired by Triton (the 30% increase in its asset-based as we mentioned above) have an average duration of 13 years.

Due to tenants struggling to get an adequate amount of containers, Triton took advantage of their turmoil to enter into extremely long (for the industry) leases. For this reason, the average remaining term of Triton’s leases is currently 78 months (6.5 years). During the prior quarter, the average remaining lease term of Triton was 59 months. This illustrates how the company has improved its medium-term cash flow visibility in such a short time.

Lease durations

Average lease duration (Investor Presentation / Seeking Alpha)

Source: Investor Presentation

Combined with Triton’s recent debt restructuring and very accurate cash flow visibility, it’s pretty safe to say that Triton’s profitability in Q1-2022 will be pretty close to Q4.

Specifically, management mentioned:

While the first quarter of the year typically represents low season for dry containers and contains the fewest billable days, we expect our adjusted net earnings per share in the first quarter of 2022 to be relatively in line with that of the fourth quarter of 2021. due to our operational dynamics.

Plus, with an expanded fleet, lower funding costs, and share buybacks (more on that later), it’s pretty safe to assume EPS will be at least as high as it is now. , plus any accretive gains. Assuming a quarterly run rate of $2.67, I’d say Adjusted EPS of around $10.68 is a pretty conservative estimate for fiscal 2022. Let’s settle on $10.00 just to be safer.

return on capital

With profitability proliferating at Triton, we should expect growing capital returns over the medium term, fueled by strong bottom line and strong cash flow visibility. In fact, capital returns are already rising, with the company increasing its quarterly dividend by 14% in October.

Triton

Triton Shareholder Value Creation (Investor Presentation/ Seeking Alpha)

Source: Investor Presentation

Regarding repurchases, Triton repurchased 1.1 million common shares (approximately 1.6% of its outstanding shares) during the fourth quarter and an additional 0.7 million common shares through February 11 2022. For context, Triton has purchased approximately 20% of its common stock since the program launched in August 2018. Talk about exceptional shareholder value creation!

Note that despite the stock’s gradual but steady rally, the stock is yielding a substantial return of 4.17%, while the payout ratio is expected to be around 25% based on our expected EPS for the year. 2022.

Evaluation

Below you can see our FY2022 Adjusted EPS estimate of $10.00, as previously explained. We have also set the DPS for FY2022 at $2.60 (current run rate, but we should get an increase in DPS in Q3-2022 to be paid in Q4-2022, thus increasing this amount.)

EPS and DPS estimates

EPS & DPS estimates (SEC filings, author)

Source: SEC filings, author

At $68.47, Triton is currently trading at around 6.8 times this year’s adjusted net earnings. Considering all of the points made in this article, as well as Triton’s massive return on capital (dividend + redemptions), the stock remains very undervalued, in our view.

Adopting a fair valuation expansion at around 10x EPS, we see upside potential of 45%+, despite the recent rally. Nonetheless, to respect the ongoing (albeit ridiculous – we explained why the stock is priced low here) valuation behavior of the market, we name an 8.5X multiple for our price target, which is now revised to $85. As a result, Triton remains a strong buy, in our opinion.

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