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Saturday, May 8, 2010

Don't Fret - Plenty of Good News Out There; Again, We Look at the Transportation Sector (Which Drives/Supports the Global Economy)

The past week illustrates how topsy-turvy the market can be on the turn of a dime, all made possible by a "Market" increasingly driven by short-term traders and quantitative momentum/technical models. We don't dismiss real challenges here and abroad (all well publicized), yet economic indicators and corporate earnings results appear to be moving in the right direction. Our view is that fundamentals ultimately drive the market and the Market. Please note that we use the "Market" to describe the living, psychological body of investors/traders that participate in the market. Our hope is that better fundamentals will conquer current concerns, although we acknowledge that (1) psychology is typically fickle and (2) many forces actually want the market to trade lower. Watch out for pundits emerging from the woodwork again calling for DOW 5,000 and armageddon.

As noted in our 4/15 post, we still need to update our "How's the Economy Doing" series. But, for now, we'll try to share various data points or news items that tell the story. Some headlines from The Journal of Commerce yesterday (note: easy Y/Y comps helping):

Asia-Europe Container Volume Surges 20 Percent
Container shipments from Asia to Europe surged 20 percent in the first quarter from a year ago as the rebound in traffic that started in the final three months of 2009 continued into 2010, according to latest industry figures.

Textainer Profit, Productivity Surge
Container lessor Textainer Group Holdings Ltd. reported net income of $24.2 million, an increase of 16 percent compared to the first quarter of 2009, with fleet utilization for the quarter exceeding 90 percent.

MISC Pre-Tax Profit Rose 49.3 Percent
Malaysian carrier MISC Berhad on Friday reported its profit before tax in the fourth quarter ended March 31 rose 49.3 percent to $85.2 million mainly due to higher profits in LNG and offshore oil support businesses.

Trucking Leads April Gains in Transport Jobs
The U.S. trucking industry added nearly 10,000 jobs in April and has added about 16,000 since February, as part of a broader recovery in freight sector employment showing up in payroll surveys by the Labor Department.

FreightCar Orders Jump Despite 1Q Loss
FreightCar America saw first-quarter orders for future railcars surge to 3,656 units from just 339 a year earlier and 185 in the final 2009 period, which pointed to an improving outlook for the company despite a $3.3 million loss.

Shipments Up 83 Percent at Echo Global Logistics
The economic recovery has wheels at Echo Global Logistics. Higher volumes from existing and new customers drove first quarter revenue up 81.5 percent from a year ago to $89.1 million at the non-asset based truck freight broker and logistics provider.

FedEx Adds 777 Freighter Orders
FedEx Express, seeking to take advantage of surging demand, will add six 777 freighters to its order of all-cargo planes from Boeing, the carrier said Friday.

AND, the above is merely a sampling. We've seen similar news headlines for weeks now.

Finally, we mentioned positive container shipping commentary from TAL International Group, Inc. (TAL) in late February. Well, here's the latest commentary from last week's earnings report (5/4):

"In the first quarter of 2010, the recovery in our operating and financial performance started to accelerate," commented Brian M. Sondey, President and CEO of TAL International. "During the first quarter, the combination of recovering containerized trade volumes and decreased global container capacity led to a global shortage of containers, strong leasing demand and increasing utilization for TAL. Our core utilization, excluding idle factory units, increased 3.1% during the quarter to reach 93.4% as of March 31, 2010...


Mr. Sondey continued "Market conditions have remained strong into the second quarter, and in general, we expect the favorable market conditions to continue. While TAL has been aggressive in placing new container orders, overall new production of containers has been fairly limited so far this year due to production constraints at the container manufacturers and reduced direct buying by our shipping line customers. As a result, we expect available container capacity to remain tight for the next several quarters. Our core utilization reached 94.5% at the end of April."

"We expect our utilization to climb further throughout the second quarter as booked containers go on-hire to our customers, and we expect our average lease rates to increase throughout the year as some customer incentives expire and as containers go on-hire at rates higher than our current average level. We also expect disposal prices to increase for the next several quarters as inventories of older containers available for sale shrink, though the overall size of our disposal gains and third-party trading margins may start to be constrained by reduced selling volumes if drop-off volumes remain at the current very low level. Our leasing revenue should start to benefit in the second quarter from our aggressive new container production, though this will result in increased interest and depreciation expense as well. Overall, we expect our second quarter adjusted pretax income to increase 10%-20% from the first quarter level, and we estimate that our full year adjusted pretax income in 2010 will be 25%-35% higher than our adjusted pretax income last year."

In addition, TAL raised it's quarterly dividend to $0.30 from $0.25 (after increasing it to $0.25 from $0.01 last quarter):
"We are pleased to increase TAL's second quarter dividend to $0.30 per share. The increase in the dividend reflects our improving profitability and the expectation that our market environment will remain favorable for at least the next several quarters. We will continue to evaluate the size of the dividend based on changes in our performance and expectations."
We remain positive on our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL), as well as our aircraft leasing business, Babcock and Brown Air Limited (FLY), all of which we believe remain undervalued relative to reasonable fair values. Backcock reported results last week and Seaspan and Global Ship Lease are on deck this week. With long-term charters in place, these are very predictable businesses that minimize surprises (positive or negative).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL, FLY.

© 2010 Jeffrey Walkenhorst
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