As you can see from the summary data, my model doesn’t depend on the company making any huge leaps in terms of efficiency or sales. Sales should grow by better than 9% a year on marginal improvement in global trade, and the margins I’ve used are close to long-term company averages. Higher depreciation expense from the jump in asset purchases should be offset by higher revenues from leasing these assets. Interest expense will increase dramatically but will also save the company millions in taxes.
What is not shown here is the opportunity in free cash flow for the company and investors. As the company starts to reduce its spending on asset purchases, the increase in free cash flow will go to pay off debt and increase the dividend payout. This kind of improvement in financial health will go a long way to improve sentiment in the shares.
My model estimates $3.59 per share for this year, 6% higher than the average consensus, and for earnings to jump higher next year to $4.08 per share. If this happens, the shares could easily test the recent highs for a total return of almost 32% over the next year and a half.
Icing On The Cake
Beyond the 32% upside target, there is a good chance this stock could quickly go much higher.
Because of management’s missteps, the company is one of the most hated in the space. Investors have borrowed and sold short 2.3 million shares, amounting to almost 11% of the shares available for trading. That compares with short interest of just 3.9% in closest peer CAI International Inc (NYSE:CAP).
Shorted interest, which must eventually be bought to cover the position, could be unwound gradually as the global trade environment improves, pushing the shares up slowly. On the other hand, this level of borrowed shares has a good chance of becoming a short squeeze where all the shorts cover their positions quickly, sending the price surging.
To see how the situation could quickly turn into a short squeeze, consider the ownership in the shares. Almost half of the shares (48% ) are owned by Halco Holdings, which will probably not sell. Another 33% are owned by institutional investors who know the stock’s potential and will wait for big upside. Another 18% of the shares outstanding are owned by mutual funds that do not trade often.
This ownership amounts to 99% of the shares outstanding, leaving the 2.35 million short positions in trouble if they have to buy back the borrowed shares in a hurry. The shareholders will be able to demand a very nice return.
Risks to Consider: Global trade has yet to fully recover and could see meager growth this year. Investors may need to wait for demand in container shipping to turn around but will receive a strong dividend in the meantime.
Action to Take –> Shares are worth $42.84 based on 2014 estimated income and could go higher on a change in ownership and sentiment. This could be a potentially great buy at current levels with profits taken if shares approach my target price of $42.83 per share.
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The article Get A 5.4% Yield And 32% Upside From This ‘Hated’ Stock originally appeared on StreetAuthority.com and is written by Joseph Hogue.
Joseph Hogue owns shares of TGH. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
