EUR 442.45 For Business Accounts Only

Nov 1 Spin to Benefit from Increased Infrastructure Spending While Parent Dominates Rail Market

Under pressure from its largest shareholder and activist investor ValueAct, Trinity Industries, Inc. (TRN) announced in December 2017 that it planned to Spinoff its infrastructure related business into a separate entity Arcosa, Inc. (ACA), while retaining its core rail car manufacturing and leasing business. The Nov 1 separation creates an opportunity for the new management to focus on the smaller Spinoff entity, which is growth-focused and is expected to benefit from US infrastructure spending.

The Edge View (TRN, Parent Ex-Spin)...
Post-Spin, Trinity Industries, Inc. (TRN) will retain the railcar services business that will operate under the “TrinityRail” brand name. TrinityRail’s integrated business model consists of rail manufacturing, leasing, and services and is a one-stop-shop for rail transportation solutions, products, and services. Although cyclical in nature, we believe that the recent recovery in the railcar market will benefit the new TRN in the near-term.

Furthermore, a pickup in industrial activity will lead to increased demand for railcars, since rail transportation is an integral component of the North American Industrial supply chain. In 2017, rail transportation contributed 25% of the total 6tn ton miles of freight in the U.S. We are also positive on TRN’s high-growth, high-margin rail leasing business that has an industry-leading 97% utilization rate. TRN is one of the largest players in the business, with a 40% market share of total North American railcar shipments in FY17.

The Edge View (ACA, Spinoff)...
Arcosa, Inc. (ACA) is a growth-focused company that will benefit from increased infrastructure spending in North America over the next few years. The company manufactures infrastructure related products including construction products, wind towers and utility structures. ACA operates in several fragmented or niche industries that have tremendous growth potential, and we believe that going forward the company will make strategic acquisitions to increase its scale of operations and market penetration. We like that ACA has no debt on its books and will have a net cash position of $210m immediately after the Spin.

As stated in its recent investor day (October 4), the management believes that its key priorities will be to grow the construction products segment both organically and through acquisitions, improve operating performance for the energy equipment segment, and expand transportation products organically as barge and rail markets recover. ACA now expects a higher revenue and EBITDA in FY19 with a recovery in some end markets and operating margin improvements.