Textainer Group Holdings Limited's Earnings Continue to Sink

By Markets Fool.com

Image source: Getty Images.

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The challenges in the shipping industry continued during the second quarter, weighing down Textainer's (NYSE: TGH) results. While there were several positives, those were not nearly enough to offset the weak market conditions. That is leading the company to issue a rather tepid outlook for the balance of the year and slash its dividend once again.

Checking in on the numbers

While demand for containers improved during the quarter, there is still an abundance of available containers on the market. This glut continues to weigh on the prices for both new and used containers as well as lease rates, which is pushing down the revenue Textainer pulls in from its containers:

Sources of revenue

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Lease rental income

$120.2 million

$128.3 million

-6.3%

Management fees

$3.2 million

$4.0 million

-17.9%

Trading container sales proceeds

$3.1 million

$4.2 million

-27.4%

Gains on sale of containers, net

$0.9 million

$1.6 million

-45.4%

Data source: Textainer Group Holdings Limited.

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Lease rental income continues to slip as a result of the drop in new container rental rates. That said, somewhat muting Textainer's decline is the fact that 85% of its fleet is under long-term and finance leases, of which only 8.5% mature this year. Further, the company experienced stronger lease-out demand during the quarter than anticipated. In fact, it recorded the three highest lease-out booking weeks in its history during the quarter. Because of that, its unbooked inventory dropped 40% while its utilization increased by 1% from the low point to its current rate of 95.1%, though that is well below last year's rate of 97.3%.

Meanwhile, container prices spiked in the quarter as a result of an improvement in demand. After hitting a historic low early in the year, new container prices jumped 20% to 25% during the quarter. Unfortunately, that pricing has not held firm, with the company noting that prices have subsequently declined a bit.

Despite all of those positives, the company's total revenue slumped 7.8% year over year to $127.4 million. Meanwhile, adjusted net income was a mere $3 million, or $0.05 per share, which was more than 92% below last year's second quarter. Driving the plunge in income was an increase in container expenses, primarily due to an increase in storage costs as a result of its lower year-over-year utilization rate.

Because of that deep drop in adjusted net income, the company is reducing the dividend. The new quarterly rate will be $0.03 per share, which represents 60% of adjusted net income during the second quarter. That new rate, however, is 93.6% less than the $0.47 per share quarterly rate the company was paying just one year ago, reflecting the steep drop in income over the past year.

A look at the outlook

Much like its second-quarter results, Textainer's outlook is very mixed. On a positive note, CEO Phillip Brewer pointed out that,

Based on recent discussions with our customers, we believe the strong increase in demand for dry containers we experienced in the second quarter will continue into the third quarter although possibly at a slightly reduced pace.

That said, he also warned that,

We do not expect a significant improvement in new container prices occurring prior to year-end. As long as new container prices remain low, rental rates for new, depot and lease-renewal containers will remain under pressure and lease rental income can be expected to decline. The credit quality of certain shipping lines is a major concern. While consolidation has strengthened some lines, the overall credit risk of our customer base has increased due to weak demand and low freight rates.

In other words, while demand for containers is picking up, that is not expected to drive prices of either containers or leases any higher. At best, the company's utilization rate should increase, which could put a floor underneath earnings. However, at worst, conditions have the potential to deteriorate even further if credit concerns do not abate.

Investor takeaway

While industry conditions improved a bit during the second quarter, that improvement does not appear to be a sustainable trend. Instead, the pressures pushing down Textainer's results seem as though they will remain in place for the balance of the year.

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Matt DiLallo owns shares of Textainer Group. The Motley Fool recommends Textainer Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.