Converting Expectations to Cash
Our economic environment is improving. With a more business friendly President we have the certainty of reduced Government regulation. Questions remain regarding health care reform, the timing and potential for tax cuts, and fiscal stimulus. Will favorable expectations remain? Given the best outcome there is opportunity for continued growth with increased financial stability. But there is also a possibility of an outcome that leads to greater global economic fragmentation and increased political and economic instability.
By raising interest rates the Federal Reserve is showing it is confident about the pace of growth. Commercial air carriers are enjoying their eighth year of aggregate industry profitability with both passenger and cargo volumes expected to further increase in 2017. Rail traffic is improving. But new railcar and locomotive order books remain soft. Both Class One’s and Railcar and Locomotive OEMs are focused on initiatives to improve performance in the current traffic environment. Examples include CSX Corporation’s recent appointment of Hunter Harrison as chief executive. His goal? Implement ‘precision railroading’ and improve the operating results of this $11 billion annual revenue Class One. FreightCar America is shutting its Roanoke Virginia railcar production facility. Trinity Industries is ‘focused on controlling cost, maintaining a strong balance sheet and on initiatives to improve performance.” National Railway Equipment is using its Locomotive manufacturing downtime to increase rebuild activity and boost their parts and service business.
During a business cycle the composition of investment risk shifts. But from lease inception to lease termination it’s equipment values that are at the heart of transactional support. Many variables affect those values, and most are not easily predictable. Over time the composition of that risk as well as its nature varies. Disciplined thinking about the ‘factors’ that affect drive economic activity and support equipment demand provide an idea today of what might happen in the future. This enables investment decisions today which will drive tomorrow’s operating results. Beyond after-tax cash flows (and accounting income), lessors and lenders draw comfort from strong underlying collateral values. An up-front understanding of this factor volatility uncovers what ultimately impacts the economics of your transaction. Monitoring the economic factors that explain equipment value volatility is a critical skill for investment success. Properly applied it acts as an early warning system. Diligence will point the way.
Which factors explain the greatest variance in industry performance and equipment values? Identifying and tying revenue and cost drivers to readily available economic indicators helps to develop asset valuation indicators that can be used to predict equipment value throughout industry cycles. Combine this with an awareness of equipment supply dynamics, the state of new equipment order books, and an entrepreneurial and focused management team, and strategies that reduce risk are uncovered. To be confident of future investment performance work with transportation equipment specialists. Combine expert equipment knowledge with advanced statistical analysis techniques and you will be able to convert expectations to cash.
 The International Air Transport Association (“IATA”) report forecast industry revenue of $736 Billion and net profit of $29.8 Billion. IATA Press Release, December 8, 2016.
 Timothy R. Wallace, Trinity’s Chairman, CEO and President, February 16, 2017 Trinity Industries Fourth Quarter and Full Year 2016 Earnings NEWS RELEASE.
* Get an next to you comment by visiting Gravatar.com and uploading a profile photo that links to your email address.