Trinity Industries, Inc. - Riding the Rails

Trinity Industries, Inc.
Trinity Industries provides products and services to the energy, chemical, agriculture, transportation, and construction sectors. The company manufacturers and sells railcars and railcar parts, steel components, highway products, construction aggregates, inland barges, structural wind towers, steel utility structures, storage and distribution containers, trench shields and shoring products, as well as provides leasing, leasing management, and maintenance of railcars. Listed competitors are Clipper Windpower Holdings, American Railcar Industries, and Lafarge North America.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $36.09, with an initial trailing stop at $31.18. Upward price movement will encounter resistance at $32.19, and then at $32.83, with final resistance at $34.01, while downward price movement will find support at $30.25, $29.49, and then at $28.65.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of Trinity Industries, Inc., the company has completed an initial assessment of the tax effects of the Act, and have made a reasonable estimate of the effects on its existing deferred tax balances. The company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to impact future tax returns. However, they are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts resulting in adjustments in future periods in 2018.

The impact of the Act may differ from the company's estimate due to changes in the regulations, rulings, guidance, and interpretations issued by the IRS and the FASB as well as interpretations and assumptions made by the Company. For the items for which they were able to determine a reasonable estimate, they recognized a provisional net benefit of $476.2 million for the year ended December 31, 2017, which is included as a component of income tax expense.

Insider Transactions
For FY17, the company recorded 76 insider trades involving 6,203,658 shares of stock. Of the 76 insider trades, 61 were Buys involving 5,829,298 shares of stock, and 15 were Sells involving 311,360 shares of stock, creating an insider buy to sell ratio of 18.9 to 1.

Future Value
My future (5 year hold) target price for the stock is $51, which is an average annual return of 12%. A prior five year hold of the stock would have returned an average of 22% per year. Please be aware that past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Please also be reminded that any investment has the potential for loss, and past performance is no guarantee of future results.

Fair Warning
Fair warning means that the time for bidding has ended and a sale is about to be concluded. In the case of Trinity Industries, Inc. (NYSE: TRN) - FYE 12/2017 the stock is UNDER VALUED and trading at levels below my most recent $45 buy target. Please See Linked PDF Worksheet

Of Note
On December 12, 2017, the company announced that its Board of Directors unanimously approved a plan to pursue a spin-off of the company's infrastructure-related businesses to Trinity stockholders. The separation is planned as a tax-free spin-off transaction to the company's stockholders for U.S. federal income tax purposes. The transaction is expected to result in two separate public companies: (1) Trinity, the currently existing company, which will be comprised primarily of Trinity’s rail-related businesses and (2) a new infrastructure company, focused on infrastructure-related products and services (the “Infrastructure Company”).

Completion of the spin-off will be subject to, among other things, the effectiveness of appropriate filings with the Securities and Exchange Commission, final approval from the company's Board of Directors, and other customary conditions. The company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. The separation is expected to be completed in the fourth quarter of 2018, but there can be no assurance regarding the ultimate timing of the separation or that the separation will ultimately occur.

Disclosure
I hold no shares of Trinity Industries, Inc. in my portfolio.
Posted on 04/09/18