The global trade rebound has been in full force during the past 12 months, after suffering a huge crash from the Great Recession of 2008. Today, shipping lines are on a mend, shipping everything from food and construction products to machinery and chemicals.
Such strong growth in trade creates an especially high demand for containers. And because demand for shipping containers has been much tighter after the 2008-2009 recession, shipping lines haven't purchased as many containers as they used to.
But now, with demand steadily increasing, container-leasing companies are the top beneficiaries of this situation, as shipping lines now rely heavily on the leasing companies to provide the necessary containers.
To understand the potential demand for containers, take a look at global gross domestic product (GDP) for the answers. The typical growth rate for containers runs around two to three times that of the global GDP. This should be in double-digit growth mode for the next few years as global economies move closer to the pre-recession levels.
As the recession hit its peak, shipping lines often saw 90% less trading volume, which meant the number of unused shipping containers started to grow. To cut unnecessary costs, shipping companies held back on buying containers, which could cost about $3,000 each.
But as demand started to accelerate again, many shippers opted to lease rather than buy new containers. They found they could sign five- to six-year contracts for less than 15% of the purchase price. This would free up cash for the shippers to use toward expanding their shipping networks rather than spending capital to buy containers.
Even though shippers still own roughly 60% of the entire container fleet, as older boxes are scrapped, many will continue to choose leasing over buying, providing a steady inflow of new leases for container leasing companies.
In addition, emerging markets are expected to propel trade volumes, with an array of Asian countries expected to grow by 8% or higher this year.
That's why I think TAL International (TAL) is well positioned to deliver exceptional results in 2013 and beyond.
TAL International is one of the world's oldest and largest lessors of intermodal freight containers. Founded in 1963, soon after the development of containerized trade, it serves virtually every major shipping line in the world.
It operates about 225 third-party container depot facilities in 39 countries. TAL International's fleet includes more than 1.9 million 20-foot equivalent units of various containers, making it one of the largest container-leasing companies in the world.
With a current yield of close to 6%, TAL International has rewarded its shareholders with steady growth and income since 2009, as you can see in the chart below.
On Feb. 13, the company announced quarterly earnings of $1.04 a share. This was a positive surprise of 9.2% above the consensus of 95 cents a share. TAL International's current quarter consensus estimate has increased 13.2% during the past 90 days from 93 cents a share to $1.05 a share.
It also reported leasing revenue of $138.8 million for the fourth quarter of 2012, an increase of 11.8% from the same period in 2011. Its adjusted EBITDA of $141.7 million for the fourth quarter of 2012 was an increase of 7.2% from the same period in 2011.
It continues to grow its business aggressively, as evidenced by nearly $875 million invested in new container purchases and sale-leaseback transactions in 2012. It also announced a quarterly dividend of 64 cents a share, payable on March 28 to shareholders of record as of March 7.
Risks to Consider: If the economy slips back into a recession or global growth stalls, this could pose a challenge for shipping lessors like TAL International. Additionally, if trends move back to purchasing containers rather than leasing, this could impair profits for TAL International. Lastly, if leasing rates fall and margins tighten, this could reduce the company's profitability. All being said, the global trends favor growth for companies like TAL International and with a dividend of nearly 6%, this stock is quite attractive.
Action to Take --> Buy TAL International up to $46 a share.
With a nearly 6% dividend and double-digit growth expectations, this company is perfectly positioned to deliver strong income through dividends and outstanding growth potential. This stock could hit $50-$55 a share (20-25% increase) during the next 12 months as the demand for shipping continues to accelerate.
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