Textainer Group Holdings Limited's Results Finally Bottom Out

By Matthew DiLallo Markets Fool.com

Last year was an excruciatingly difficult one for the shipping industry, culminating in the late-summer bankruptcy of South Korean shipping giant Hanjin. However, the sinking of Hanjin seemed to signal the low-water mark in the sector as industry conditions have since noticeably improved, which led to a visible recovery in Textainer Group Holdings' (NYSE: TGH) financial results. While the sector still has a long road to recovery ahead of it, Textainer remains optimistic that the worst is behind it.

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Textainer Group Holdings results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$120.1 million

$129.7 million

(7.4%)

Adjusted net income

($13.6 million)

$12.9 million

N/A

Adjusted earnings per share

($0.24)

$0.23

N/A

Data source: Textainer Group Holdings Limited.

What happened with Textainer Group Holdings this quarter?

Market conditions finally started to improve:

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  • Lease rental income slumped 15.3% to $105.9 million due to lower average rental rates, lower utilization, and lost revenue from the Hanjin bankruptcy.
  • However, the company partially offset that weakness with revenue from other sources. Management fees edged up 0.4% to $3.6 million, trading container sales proceeds leaped 387.7% to $6.5 million, while it recorded a net gain on the sale of containers of $4 million after recording a $0.3 million loss in the year-ago period. Driving those gains was a significant improvement in container and lease pricing.
  • While Textainer reported an adjusted loss during the quarter, its loss narrowed by $38.7 million compared to the third quarter.
  • Textainer said that it had made significant progress recovering the containers it had leased to Hanjin. It is in the process of recovering 80% of the containers, was actively negotiating the release of another 13%, and said that it was attempting to retrieve the other 7% in small batches. Overall, it expects to recover about 90% of the containers, up from a range of 70% to 90% last quarter. Furthermore, it has $80 million in insurance, which it now believes will "substantially cover unrecovered containers, lost revenue and recovery and repair costs."

Image source: Getty Images.

What management had to say

CEO Phillip Brewer commented on the company's results by saying:

Our fourth quarter results improved significantly compared to the prior quarter, primarily due to improved market conditions and the prior quarter's results being significantly impacted by Hanjin. Our adjusted net loss decreased by $38.7 million, compared to the prior quarter.

Market conditions have improved dramatically over the past few months. Brewer would go on to note that new container prices are up 70% from the low point of last year while used containers are up 15% to 25% since last September. Because of this, rental rates and margins on container lease-outs "have more than doubled to levels not seen for several years."

Likewise, container leasing peer CAI International (NYSE: CAI)saw several positive trends during the quarter. According to CAI International CEO Victor Garcia in the company's earnings press release:

Many of the underlying trends that negatively affected the container industry have reversed over the past three quarters... Per diem rates on new and depot equipment have doubled as demand for equipment has strengthened along with the increase in utilization and new container prices. These positive trends are expected to reduce the pressure on renewal rates on expiring contracts.

Looking forward

The chief executives of both Textainer and CAI International see these positive trends continuing in 2017. CAI's Garcia said that "we believe that the tightness of the market and improved rate environment will continue over the coming months" and that there could actually be a temporary shortage of containers due to an expected retooling at container factories next quarter. Textainer's Brewer also sees "a number of positive trends that should help us turn the corner from a difficult 2016." While he did warn that the company still has to get through the Hanjin recovery process, which could weigh on results in the near term, he stressed that the "important point is that our industry has passed the bottom of this cycle and is showing strong signs of recovery."

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Matt DiLallo owns shares of Textainer Group Holdings Limited. The Motley Fool recommends Textainer Group Holdings Limited. The Motley Fool has a disclosure policy.