Trinity is recapturing market share in declining railcar market

Implications: Trinity Industries (TRN) reported earnings growth and increasing orders and deliveries in an otherwise declining market for new railcars, a feat that will probably elude the other railcar builders. Its 6,580 deliveries during the second quarter represented a 44% market share for the entire industry, and its orders for 7,430 cars accounted for 61% of the industry total. Moreover, Trinity said it expects its earnings in the third quarter to be close to those of the second. Is Trinity returning to its old strategy when it and its merger partner Thrall Car had an annual 61% market share?

Analysis:

In 2007, 63,156 new railcars were delivered by the six railcar builders, down from 74,683 cars delivered in 2006. This year, current estimates range from 53,000 to 55,000 new deliveries. Moreover, orders for immediate delivery have been falling for the past 18 months, averaging slightly over 10,000 cars per quarter and implying an approaching delivery rate of 40,000 cars per year. Most railcar builders have been reporting significant reductions in deliveries and orders for the past year, all except for Trinity.

 

Prior to its merger with Thrall, Trinity was known as an aggressive player in the market, often sacrificing margins for market share. That strategy was publically renounced in 2003 when management proclaimed that they were more interested in margins than market share. As a consequence of that change, Trinity lost market share almost immediately, building to just 26% of all cars in 2003, while handling Freightcar America almost all of the coal car market and surrendering its significant share of intermodal deliveries to Greenbrier.

 

Trinity has apparently not changed its strategy on pricing however, but it is being more aggressive in the leasing business, offering deep discounts in monthly lease rates for its new cars that other lessors have been reluctant to match. The strategy may be a way out of the boom –to-bust cycle for car builders who suffered in the past when some railcar lessors overestimated the market and ordered too many cars. When the latter stopped buying to let supply and demand come into balance, the builders went into a depression, cutting workforces, shutting plants, and watching orders plummet 75%.

 

The strategy is not without risks, but Trinity is betting that the past will be repeated and that it will emerge from the current downturn with a larger share of the overall market and a larger leased fleet that will be available to serve the railroad industry for the next 30 years.