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2 Top Growth and Income Companies for 2018

Brian Hamilton

This week’s Growth and Income video highlights a shipping container company, Triton International (TRTN), and KLA Tencor (KLAC) a process control and yield management solutions company.  Both of these firms have seen solid growth over the past few quarters and pay solid dividend yield.

First Triton International (TRTN), a Zacks Rank #1 (Buy) offers acquisition, leasing, re-leasing, and sale of intermodal containers. The company's leasing equipment consists of Dry Freight Containers, Refrigerated Containers, Special Containers, Tank Containers and Chassis. Triton International Limited, formerly known as TAL International Group, Inc., is based in Hamilton, Bermuda.

Earnings and Estimates

On November 8th, TRTN announced earnings where they easily beat both the Zacks consensus earnings and revenue estimates.  Total leasing revenues were up +21.9% YoY, and +7.2% QoQ with its average utilization rates up +5.2% YoY, and +1.1% QoQ.  The total average utilization rate for Q3 hit 97.6%.  Further, container utilization was up another +0.4% after the earnings announcement (to 98%).  Net income jumped up to $57.2 million compared to a loss of $36.3 million in the year ago quarter.  Management also approved a $0.45 dividend to shareholders of record at the close of business December 1, 2017.  The current dividend yield stands at +4.5%,

Due to the strong earnings, and positive growth drivers going forward, analysts have increased their estimates for Q4 17, Q1 18, FY 17 and FY 18 over the past 30 days; Q4 17 increased from $0.70 to $0.81, Q1 18 improved from $0.71 to $0.83, FY 17 was lifted from $2.59 to $2.75, and FY 18 jumped up from $3.49 to $3.78. 

Drivers for Future Growth

According to management, “low inventory of available containers will keep market conditions firm.  In addition, the traditional peak season for refrigerated containers is starting, and we have seen the supply / demand balance for refrigerated containers tighten ahead of the peak season over the last few months.”  Management now expects their utilization rates to remain near peak levels during the fourth quarter (traditionally the slowest season). 

During the earnings announcement, management stated that they raised funds for the purchase of new containers; raising $192.9 million through September.  Currently, TRTN controls 30% of production of dry containers, and almost 60% of production for lessors.  As of the earnings release, the company has ordered $1.6 billion of sale leaseback and new containers which will be delivered in 2017, and they have ordered about $100 million worth of new containers for delivery in 2018.

Further, almost half of new leases have increased their leasing periods from 5 to 7 years.  Also during this current up cycle the company has seen higher renewal rates. These longer term leases are expected to increase returns for a much more extended period of time than in previous leasing cycles.

Another tailwind for the company is the recent International Monetary Fund raising global growth expectations for both 2017 and 2018; 2017 is expected to grow at +3.6%, and 2018 at +3.7%.

Price and Earnings Consensus Graph

As you can see in the Price and Earnings Consensus graph below, both the consensus annual earnings estimates and stock price have been on an upward trend since the beginning of the year.

Triton International Limited Price and Consensus

Triton International Limited Price and Consensus | Triton International Limited Quote

Our second pick, KLA-Tencor (KLAC), a Zacks Rank #1 (Strong Buy), was formed through the merger of KLA Instruments (KLA) and Tencor Instruments (Tencor), two long-time leaders in the semiconductor equipment and yield management software system industry. Prior to the merger, both businesses served a segment of the inspection and metrology area; with KLA focused on defect inspection solutions and Tencor placing its emphasis on metrology solutions. Merging together in a one-to-one stock swap valued at $1.3 billion, KLA-Tencor became the most important process control player in the industry, bringing to market a complete line of yield management products and services from a single company.

Earnings and Estimates

On October 27th, KLAC announced Q1 18 earnings where they beat both the Zacks consensus earnings and revenue estimates for the 9th consecutive quarter.  During the quarter, the company posted records in shipments, revenues, and non-GAAP earnings per diluted share.  On a year over year basis, revenues were up +29.2%, net income grew by +57.9%, and earnings per diluted share rose by +55.2%. 

This record breaking quarter caused analysts to increase their earnings estimates for Q2 18, Q3 18, FY 18 and FY 19 over the past 30 days; Q2 18 increased from $1.67 to $1.70, Q3 18 rose from $1.74 to $1.81, FY 18 was lifted from $6.80 to $7.16, and FY 19 improved from $7.27 to $7.54. The company has a nice +2.3% annual dividend yield.

Drivers Going Forward

The demand for semiconductors continues to grow at a rapid rate, and along with this, new innovations and quality are being developed by several chip producers.  KLA is at the forefront of inspecting defects, general materials research, and the data storage industries. 

The company’s inspection and metrology products and related offerings are utilized in the semiconductor, data storage, and light emitting diode segments including; Chip Manufacturing, Wafer Manufacturing, Reticle Manufacturing, LED, Power Device and Compound Semiconductor Manufacturing, Data Storage Media/Head Manufacturing, Microelectromechanical Systems (MEMS) Manufacturing, and General Purpose/Lab Applications.

Basically, KLAC is involved in almost every high growth technology segment, and as the technology segment continues to grow so are the expectations of KLAC.  Overall, the Technology sector has seen +22% YoY growth in Q3 17, and the sector is expected to see double digit growth over the next three consecutive quarters. 

Price and Earnings Consensus Graph

As you can see in the Price and Earnings Consensus graph below, both the consensus annual earnings estimates and stock price have been on an upward trend since the end of 2015.  Most importantly, we see three years of annual earnings estimate increases.

KLA-Tencor Corporation Price and Consensus

KLA-Tencor Corporation Price and Consensus | KLA-Tencor Corporation Quote

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