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Why Trinity Industries Shares Derailed on Thursday

Lou Whiteman, The Motley Fool

What happened

Shares of railcar manufacturer Trinity Industries (NYSE: TRN) fell more than 9% on Thursday despite the company reporting first-quarter earnings that came in ahead of estimates, with investors more focused on a revenue miss and tepid guidance for the full year than on the strong earnings number.

So what

Trinity reported first-quarter earnings of $0.24 per share on revenue of $604.8 million. The earnings number was a solid beat of the $0.20-per-share consensus, but the sales were below the $674.9 million in revenue analysts had expected. The company said it expects to earn between $1.15 and $1.35 per share for the full year, placing the midpoint guidance, $1.25 per share, below the $1.31-per-share figure analysts were anticipating.

The company also maintained prior guidance that it expects to produce between 23,500 and 25,500 railcars for the year. But investors could be cautious, because Trinity said it expects to hit that full-year earnings guidance in part thanks to a lower-than-expected tax rate and reduced corporate expenses.

A line of tanker cars in front of a rail station.

Image source: Getty Images.

Trinity also removed from its backlog orders for about 3,050 railcars valued at $240 million because of "the financial condition" of one of its leasing customers. The company did not identify the customer, though it seems likely it was an energy company. Trinity is in negotiations over compensation for the termination, and the company noted that all of the contracts removed from backlog were planned for delivery after 2019, so the move does not impact current-year guidance, but it could have raised concerns among investors.

Now what

Shares of Trinity and other railcar makers tend to be volatile and trade in part based on sentiment about the overall health of the economy. The company's stock lost 43.8% of its value in the fourth quarter of 2018, only to recover in 2019 prior to rival Greenbrier Companies' forecasted weaker-than-expected first-quarter numbers.

Trinity is a solid operator, and Thursday's downward plunge might end up looking like an overreaction in hindsight. But given the lingering concerns about potential trade wars and where we are in the economic cycle, coupled with rail-specific issues including a push by railroads to do more with less equipment, investors were unwilling to give Trinity the benefit of the doubt after a noisy quarter.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.