TAL International: Zacks’ Bear of the Day Play

The demand for commodities continues to decline as growth worries in China, Europe, and emerging markets continues to rise.  This has put pressure on commodity producers, and suppliers of a vast array of products and materials.  One such group that has been feeling the commodity pain are companies that ship and transport products and materials.  This brings us to TAL International Group (TALSnapshot Report) the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is a lessor of intermodal containers and chassis. The Company operates in the intermodal transportation equipment industry, and has two business segments: Equipment Leasing and Equipment Trading. The Company’s global operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers. It leases dry freight containers, which are used for general cargo; refrigerated containers that are used for perishable items; and special containers, which are used for heavy and oversized cargo; and chassis that are used for the transportation of containers domestically via rail and roads; and tank containers, which are used to transport bulk liquid products. It also involves in the resale of containers to container traders and users of containers for storage and one-way shipments, as well as finances port equipment, such as container cranes, reach stackers, and related equipment.

The company reported Q1 16 results last Thursday, and the company had a huge miss on the bottom line but did slightly beat expectations on the top line.  The company saw year over year declines in net income -75.2%, adjusted EBITDA -15.4%, adjusted pre-tax income -61.1%, and net income per share -75.6%.

According to Brian Sondey, President and CEO, “The first quarter is typically our weakest quarter of the year since it traditionally represents the slow season for dry container leasing and disposals. This year, the typical seasonal weakness combined with difficult global economic conditions to create a very weak market environment. New container prices, market leasing rates and used container sale prices all decreased further during the first quarter, and leasing demand remained limited. The further decrease in used container selling prices had a particularly large impact since the lower sale prices led to larger losses on units sold plus resulted in mark-to-market losses on our inventory of equipment held for sale. This mark-to-market effect increased our loss on disposal by $8.0 million in the first quarter, though the impact will shrink once used container sale prices stabilize.”

As you can see from the graph below, the stock price and consensus estimates have been falling for the past two years.

Decreasing Estimates

Due to the poor earnings performance, and a weak market environment estimates for Q2 16, Q3 16, FY 16 and FY 17 have all declined over the past seven days; Q2 16 fell from $0.52 to $0.23, Q3 16 dropped from $0.53 to $0.37, FY 16 plummeted from $2.13 to $1.43, and FY 17 fell from $2.39 to $2.29.

Bottom Line

The company has an impeding merger with Triton that is expected to close in June of this year.  Management expects to see $40 million in cost savings once the merger is complete.  But until the merger is final, the company still faces the same weak market environment into June.  So it would be wise to stay away from this company till the merger is complete.

If you are inclined to invest in the Transportation Equipment & Leasing segment, you would be best served by staying away from the sector as a whole.  Currently of the 13 companies in the sub-sector, none carry a Zacks Rank of 2 or better.  They are all holds or sells.

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