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Trinity Industries Inc. (TRN): Zacks Rank Buy

Zacks Equity Research

Trinity Industries Inc. (TRN) has delivered positive earnings surprises in three out of the last four quarters outpacing the Zacks Consensus Estimate by an average of 18.2%. This railcar manufacturer reported excellent second-quarter 2012 financial results lifting the stock price by nearly 26%.

Following this strong performance, earnings estimates have been moving higher, helping Trinity achieve a Zacks #1 Rank (Strong Buy) on Aug 15, 2012. A bright financial outlook along with a forward P/E of just 9.3 makes Trinity an attractive pick for value investors.

A Robust Quarter

On July 25, Trinity reported strong financial results for the second-quarter 2012. Earnings per share of 84 cents surpassed the Zacks Consensus Estimate by 11 cents (15.1%) and the year-ago earnings by a convincing 47 cents (127%). Total revenue of $1.02 billion beat the Zacks Consensus Estimate by 3.3% and increased 45.2% year over year. All the six reporting segments of the company generated significant year-over-year revenue growth.

Trinity expanded margins across the board in the second quarter. Gross margin was 20.1%, an improvement of 40 basis points over the prior-year quarter. Operating margin was 14.7%, up 170 basis points over the prior-year quarter, and net margin was 6.6%, up 240 basis points year over year. EBITDA was $204.8 million, up a sharp 42% over the prior-year quarter.

Outlook Raised

Increasing demand for railcars, specialty barges, and tank containers enabled management to raise its fiscal 2012 earnings per share guidance from $2.55 - $2.70 to $2.95 - $3.10. As of June 30, 2012, Trinity had $3.2 billion of railcar backlog, $542 million of inland barge backlog, and $817 million of structural wind tower backlog.

Estimate Revisions Shoot Up

Estimates for Trinity have been rising over the last 60 days. The Zacks Consensus Estimates moved up 10.9% to $3.05 for 2012 and 5.4% to $3.51 for 2013. The current Zacks Consensus Estimates indicate a solid year-over-year gain of almost 84.8% for 2012 and 15.2% for 2013.

Plenty of Value

Trinity's shares had taken a dive from March 2012. However, the trend reversed from July 25 with the shares returning to a growth trajectory.

Going forward, there is an untapped potential locked in the stock. This is evidenced by its current forward P/E of just 9.30, a P/S of only 0.61, and P/B multiple of just 1.12 (a P/E ratio below 15.0, a P/S ratio below 1.0, and a P/B ratio under 3.0 generally indicate value).

The above multiples are in contrast to the peer group average of 9.90x, 0.67x, and 1.46x, respectively, indicating that Trinity is at present highly undervalued.

Other solid multiples speaking in Trinity's favor are a trailing 12-month ROE of 10% and a current dividend yield of 1.6% compared with the industry average of a paltry 0.6%.

Solid Chart

The widening gap between the stock price line and the estimate lines of 2012 and 2013 indicates that Trinity is currently undervalued. This should encourage investors as the company is likely to sustain its positive trend riding on the back of a growing U.S. transportation, energy, and construction industry.

Headquartered in Dallas, Texas, Trinity Industries Inc. was founded in 1933. The company serves several industries including transportation, construction, and energy through its products and services. The company operates predominantly in the U.S., Canada, Mexico, the U.K., Singapore, and Sweden.

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