They outperform comparable stocks for years

“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.

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Topic: Spinoffs

Upcoming spinoff set to spur Trinity


Trinity Industry Inc LISTEN:  

TRINITY INDUSTRIES INC. $36 (New York symbol TRN; Manufacturing & Industry sector; Shares o/s: 149.3 million; Market cap: $5.1 billion; Dividend yield: 1.5%; Takeover Target Rating: Medium; www.trin.net) makes a variety of metal products for many industries.

Its five main operating segments are Rail (railcars and components), Construction Products (highway-safety products, concrete and aggregates like sand, gravel and crushed stone), Inland Barge (barges), Energy Equipment (wind turbines), and Railcar Leasing and Management. The company operates mainly in North America.

Trinity’s revenue rose 46.4%, from $4.4 billion in 2013 to $6.4 billion in 2015. That gain was mainly due to acquisitions of smaller firms and improving demand for rail cars. Revenue then fell to $4.6 billion in 2016 due to declines for its Rail and Inland Barge units. Revenue fell again in 2017 to $3.7 billion.

The company’s earnings jumped 115.7%, from $369.2 million in 2013 to $796.5 million in 2015. Due to fewer shares outstanding, earnings per share rose at a faster rate of 117.1%, from $2.34 to $5.08.

Due to the lower revenues, earnings fell to $2.25 a share (or a total of $343.6 million) in 2016. Profit then shot up to $4.52 a share (or $702.5 million) in 2017. However, if you exclude a gain related to the new U.S. tax code, Trinity earned $1.52 a share in 2017.

In December 2017, the company announced it would spin off its infrastructure-related businesses as a separate company. Trinity has yet to announce details of the transaction. However, investors won’t be liable for capital gains taxes until they sell their new shares. Trinity expects to complete the spinoff by the end of 2018.

The new company would focus on construction materials (such as highway guardrails and gravel), inland barges, and energy equipment (such as electrical transmission towers and fuel storage tanks). In 2017, those businesses accounted for 41% of Trinity’s total revenue, but just 21% of its profit.

If you exclude costs related to the spinoff, Trinity earned $0.30 a share in the three months ended March 31, 2018, unchanged from a year earlier. However, weaker demand for barges and energy equipment caused its revenue to fall 5.2%, to $831.3 million from $877.3 million.

The company’s total debt at the end of the quarter was $3.2 billion. That’s a high 63% of its market cap. It also held cash and equivalents of $846.2 million, or $5.61 a share. However, Trinity plans to use that cash to redeem $449 million worth of notes in June 2018.

The outlook for the spinoff company is bright. It’s already a leader in many of its niche markets, and stands to gain as the U.S. government spends more on infrastructure projects in the next few years. Trinity will also make sure the spinoff has manageable debt and enough cash to invest in its businesses and make acquisitions.

The remaining firm will focus mainly on railcars, including leasing and maintenance services. It should also benefit as rising crude oil prices push up demand for tanker cars. However, the high number of railcars in storage will continue to depress leasing rates.

The stock is down about 5% since Trinity announced the spinoff. It now trades at 27.3 times this year’s forecast earnings of $1.32 a share. The $0.52 dividend yields 1.5%.

Trinity Industries is a spinoff buy.

  • Based in Dallas, Texas, originally began operating in 1933 as Trinity Steel.
  • In 1958, merged with Dallas Tank and Bender-Wallace Development Co. to form Trinity Industries.
  • Has 15,600 employees in U.S., Canada and Mexico.

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