PSB Monthly Issue October 2009

| October 6, 2009

October 2009


You’ve probably never heard of Malcom P. McLean.  Most people outside of the shipping business don’t know anything about him.  And that’s a real pity.

You see, McLean revolutionized the way goods are transported around the world.  His ingenuity and entrepreneurial spirit helped bring about the modern global economy we have today.

McLean’s story is one of the great tales of American industry.

When McLean graduated from high school in 1931, he went to work pumping gas at the local service station.  America was mired in the Great Depression and he couldn’t afford further schooling.

By 1934, he had saved enough money to buy a second-hand pickup truck for about $120.  With this single truck, he started his first business, McLean Trucking Co.

In 1937, McLean first had the idea that would change global trade forever.  He was delivering bales of cotton to a ship bound for Istanbul.  Back in those days, each crate had to be lifted onto the ship one at a time.

The process was very labor intensive and time consuming.

McLean thought there must be a better way.  Instead of loading cargo piece by piece, why not just hoist the entire truck onto the ship?  It would save lots of time and money.  And, the truck could be used to deliver the cargo at the final destination.

McLean didn’t know it then but he was contemplating what we know today as intermodal freight transportation.  It would be another 20 years before he put his idea into action.

By the early 1950s, McLean Trucking had grown into the second largest trucking company in the U.S.  It would soon become the first trucking company listed on the New York Stock Exchange.

Although his trucking company was flourishing, McLean never gave up on his cargo loading idea.  He finally put the idea into action in 1956.

McLean acquired a T-2 tanker called the Ideal X to carry out his mission.  The ship would sail from Newark, New Jersey to Houston, Texas.

A raised platform with slots was installed on the main deck.  To this platform, he attached 58 trailer trucks that had been separated from their running gear on the pier.

When the Ideal X reached Houston, the 58 trailer trucks were lifted off the ship.  Each one was attached to new running gear and delivered to its intended destination.  The process worked like a charm.  More importantly, the cargo didn’t have to be handled by longshoremen.

And thus, the first cargo containers and the first container ship were born.

Before the Ideal X voyage, McLean had purchased a small steamship company. Afterward, McLean gave up his trucking company to focus on his new shipping business.

To make the business profitable, he had to improve the design of the containers and ships.  The containers were modified so they could be stacked on top of each other. Then he rebuilt the ships to carry stacked containers both below and on the main deck.

This greatly increased the number of containers that could be transported on a single voyage.  And, it drastically reduced shipping costs for customers.

By the 1960s, McLean was expanding the reach of his shipping operation.

He opened routes to Puerto Rico, to the West Coast through the Panama Canal, and to Alaska.  He also was the first to carry containers to and from Europe.  And, his ships carried supplies to and from South Vietnam during the war years.

By then, the superiority of the container system was apparent.  The industry grew like a weed.  Bigger ships, larger cranes, and more sophisticated containers were all developed.

McLean eventually sold his interest in the company to RJ Reynolds.

McLean’s pioneering of “containerization” is one of the most important industrial advancements in history.

Fortune Magazine lists him as one of the 10 outstanding innovators of the 20th century.  And, Forbes Magazine described McLean as, “One of the few men who changed the world.”

But, he wasn’t done yet.

In 1991, at the age of 78, McLean founded a new shipping company.  This company operates in a lucrative niche of the shipping industry protected by strong barriers to entry.

McLean passed away in 2001, but his company lives on.

Let me introduce, Trailer Bridge (TRBR).

Key Investment Data

Name:  Trailer Bridge
Ticker Symbol:  TRBR
Market Cap:  $63 Million
Recent Price:  $5.30

PSB Rating System 4.6 Stars

Raging Revenue:  (4.0 stars) Revenue has grown 9% a year over the past five years.  After dropping this year, revenue is expected to rebound in 2010.

Beautiful Books:  (5.0 stars) Earnings are expected to skyrocket 170% this year to $0.19.  And, they’re expected to soar 137% in 2010 to $0.45 a share.

Stellar Structure:  (4.8 stars) Insider ownership is very strong at 86%.  They obviously believe very strongly in the company’s future. Institutional ownership is solid at 13%.

Valuation Verification:  (4.8 stars) The stock is badly mispriced by the market.  Based on our valuation analysis, we think the stock is worth at least $11 a share.  That’s upside potential of 108% or more.

Meaningful Milestones:  (4.5 stars) After three straight years of losses, the company is set to turn a profit this year and next.


TRBR provides trucking and marine freight transportation between the continental U.S., Puerto Rico, and the Dominican Republic. They were the first to provide this unique combination of over-the-road and over-the-water transportation.

Here’s how it works.

TRBR’s trucks pick up trailers anywhere on the U.S. mainland.  The trailers are driven to the company’s port facility in Jacksonville, Florida where they’re loaded on to barges. The barges are then towed by tug boat to Puerto Rico and the Dominican Republic.

The company also carries freight from Puerto Rico and the Dominican Republic back to the U.S. mainland.  Then their fleet of trucks delivers the cargo to their intended destinations.

TRBR benefits from a huge barrier to entry into its industry.

This barrier is the Jones Act.  It requires that all goods transported by water between U.S. ports be carried in U.S. flag ships constructed in the U.S., owned by U.S. citizens, and crewed entirely by U.S. citizens.  The Jones Act makes it impossible for foreign owned shipping companies to enter this market.

However, TRBR does have competition from three American shipping companies in the Puerto Rico lane.

Even though these competitors are larger, TRBR is grabbing market share from them.  Their share has jumped from just 12.7% in 2005 to over 15% last year.  You see, most customers choose their shipping company based on price.  And, TRBR is the low-cost provider.

How do they keep their costs so low?

One way is with their 53 foot high cube containers.

TRBR is the only company serving this market that uses them.  They have 61% more space than the competition’s standard 40 foot containers.  This enables TRBR to offer lower per cubic foot shipping costs on both land and sea.

Another way is by using tug/barge vessels.

They’re much more cost efficient than competitors’ self-propelled vessels.  Tug/barge vessels have reduced Coast Guard manning requirements and higher fuel efficiency. Plus, they’re cheaper to build and maintain.  Thus, TRBR is able to offer much lower costs per unit mile at sea.

In addition to low prices, TRBR also provides an important convenience to its customers.

The company’s intermodal service model is built around 53 foot equipment.  That’s important to customers because it’s the standard for movements on the mainland. With TRBR, the customer can use the same containers for over-the-road, railroad, and marine service.

To see that TRBR’s business model is a huge success, you need to look no further than their list of blue chip customers.

TRBR transports automobiles for General Motors, Chrysler, and Ford.  They ship retail goods for K-Mart, JC Penney, Home Depot, Walgreen’s, and Toys R Us.  And, Costco recently chose TRBR as its exclusive shipping company.

As you can see, this company has a great business.

They’re the low cost provider in a niche market with big growth potential.  Their market share is expanding.  And, their business model is protected from foreign competition by the Jones Act.

Now, let’s take a look at their financial numbers.


Despite the economic recession, business is beginning to turn around for TRBR.  Just take a look at their second quarter numbers.

Revenue increased 10.1% over the first quarter.  A big contributor was surging revenue from its new Dominican Republic service.  And, the company returned to profitability with net income of $0.7 million or $0.05 per share.

We’re also seeing another important sign that business is improving.

Earnings estimates for TRBR are moving higher.  In the past 30 days, the current year estimate has jumped 73% to $0.19 per share.  And, the 2010 estimate is up more than 12% to $0.45 per share.  These represent year over year increases of 170% and 137% respectively.

Looking at the balance sheet, however, one item sticks out like a sore thumb.

The company has a stockholders’ deficit of $1.8 million.  While this is cause for some concern, TRBR is not on the verge of default.  Their long term debt of $107 million isn’t due until 2012.  They’re buying back debt at a discount whenever possible.  And, they’re in compliance with their financial covenants.

The important thing is TRBR has plenty of liquidity.

They have $9.2 million in cash, $10 million in working capital, and $8.2 million in available credit.  More importantly, net cash from operations is increasing.  For the first half of 2009, net cash flow jumped to $5.4 million from just $1.1 million a year ago.  In our opinion, TRBR has sufficient liquidity to weather the rest of this recession.

That’s not to say an investment in TRBR is completely without risk.

TRBR is a co-defendant in several antitrust class action lawsuits brought by shippers in the Puerto Rico trade lane.  They’re incurring substantial legal fees defending themselves and are subject to legal damages.  However, if the court grants their motion to dismiss the lawsuits, this matter will be put to rest.

Another risk is a spike in oil prices.  While the company collects fuel surcharges, they may not immediately offset any increased fuel cost.

A third risk is the company’s reliance on its vessels and port facilities.  A total loss or damage to these from a hurricane or other sea perils could cause their business to suffer.

Despite these risks, now’s a great time to establish a position in TRBR.


The stock is down significantly from its highs because of the credit crisis and economic recession.  At these prices, the stock has huge upside potential.

A price to sales (P/S) ratio analysis suggests a much higher stock price.

The average P/S ratio in the shipping industry is 1.02.  But, TRBR’s P/S ratio is a mere 0.52.  With a P/S ratio equal to the industry average, TRBR would be trading at over $10 a share.  That’s about double the stock’s recent price.

As the economy recovers, TRBR should continue seeing higher and higher volumes in its shipping lanes.  This should translate into growing revenue and earnings.  And, ultimately a much higher stock price.

We might even see it trade up to its old highs above $15.  That’s about 186% higher than its recent price.

Based on our analysis, TRBR is worth at least $11.00 a share.  Buy TRBR now for potential gains of 108% or more.


BUY Trailer Bridge (TRBR) up to $6.63 per share.

Recent price is $5.30.

Use a stop-loss of $2.65 on this position.

Don’t forget your position sizing and stop-loss rules.



The solar power equipment industry was hit hard by the financial crisis and economic recession.  The financial crisis severely cut the flow of credit for solar energy projects.  This delivered a big blow to demand for solar power.

Then, the recession caused oil prices to plummet.  Low oil prices rendered solar power panels less cost effective.  This in turn caused solar power panel manufacturers to cut back on their production capacity expansion plans.

Now that the financial crisis has been averted and the economy is starting to recover, we should see a reversal of these trends.

Governments around the world have implemented various tax credits and other incentives to encourage the use of solar power.  China offers subsidies of 50% to 60% of solar panel installation costs.  And, the U.S. stimulus package provides a 30% tax credit on the installation of solar energy systems.

With the global economy starting to recover, oil prices are rising.  Higher oil prices should make solar cost competitive and stimulate demand for solar modules.  And, increasing demand for solar power should encourage the solar power manufacturers to expand production capacity.

This all adds up to better times ahead for the solar power equipment manufacturers. With most of these stocks well off their 52-week highs, I think now’s the perfect time to establish a position in this space.

The big question is which stock do we buy?

You all know I prefer to go with the industry leader whenever possible.  As luck would have it, the industry leader is a steal at today’s prices.

Introducing, GT Solar International (SOLR).

Key Investment Data

Name:  GT Solar International
Ticker Symbol:  SOLR
Market Cap:  $757 million
Recent Price:  $5.28

PSB Rating System 4.5 Stars

Raging Revenue:  (4.0 stars) Revenue is expected to drop 6.5% this fiscal year before jumping 21.5% next fiscal year.  New orders have bottomed and are starting to rise.

Beautiful Books:  (4.2 stars) The company’s long term earnings growth rate is 50% a year.  Earnings are expected to decline 18% this fiscal year.  But, they’re expected to rise 20% next fiscal year.

Stellar Structure:  (4.8 stars) Insider ownership is very high at 78%.  Institutional ownership is a solid 17%.  There’s plenty of room for institutions to increase their holdings and drive the stock higher.

Valuation Verification:  (4.8 stars) The stock is badly mispriced by the market.  Based on our valuation analysis, we think the stock is worth at least $12 a share.  That’s upside potential of 127% or more.

Meaningful Milestones:  (4.5 stars) The company recently opened its new Asia headquarters in Shanghai, China.  This new facility makes it easier for Asian companies to do business with SOLR.


SOLR is the world’s largest provider of specialized manufacturing equipment and services for the production of photovoltaic wafers, solar cells, modules, and polysilicon. Their customers are some of the largest polysilicon, solar wafer, cell and module manufacturers in the world.

SOLR operates two lines of business.

Their photovoltaic business manufactures and sells DSS furnaces and other equipment for producing multicrystalline wafers.  SOLR has the leading position in this lucrative market.  They sell these products separately and as part of a complete turnkey system.

Photovoltaic systems are used in industrial, commercial, and residential applications to convert sunlight directly into electricity. Volatile energy prices, increased environmental awareness, and the desire for energy security are driving the rapid adoption of solar power.

Last year, total global photovoltaic industry revenue was $37 billion.  And, these sales are expected to jump 45% to over $53 billion in 2013.

To achieve this kind of long term growth, polysilicon producers and solar manufacturers must increase their investment in manufacturing capacity.  Last year they spent $4 billion dollars on new polysilicon production capacity.  This bodes well for SOLR’s future sales.

SOLR’s polysilicon business provides CVD reactors and other equipment for manufacturing polysilicon.  Polysilicon is the key raw material used to produce solar wafers.  It’s also used to make semiconductor wafers for microelectronics.

Many analysts claim there’s a huge glut of polysilicon on the global market.  If so, SOLR could see a huge drop off in this business over the next 12 months.  But, SOLR’s management disagrees.  They insist there isn’t enough high quality silicon to meet growing global demand.

Now, let’s take a peek at the company’s financials.


SOLR had a phenomenal fiscal year 2009 (their fiscal year ends in March).

Revenue soared 122% to a record $541 million.  Net income and earnings per share both rocketed 144% higher to $88 million and $0.61 respectively.  And, they finished the year with a huge order backlog of $1.18 billion.

However, as the economy fell into recession, SOLR began seeing a slowdown in customer spending.  This trend is continuing so far in fiscal 2010.

First quarter numbers were better than the year ago period but missed analyst estimates.  Revenue jumped 26% to $71.8 million.  Net income surged 53% to $7.8 million.  And, earnings per share popped 67% to $0.05.

Unfortunately, management expects the slowdown to continue for the rest of this fiscal year.  They lowered revenue guidance to a range of $450 million to $550 million. And, they decreased earnings per share forecasts to a range of $0.45 to $0.60.

Remember, lowered expectations increase chances of upside surprises going forward.

There’s also another important reason to be optimistic.

Orders for new equipment have reached bottom and are starting to rise again. That’s the best time to buy shares of solar equipment companies.  Often, their stocks will start moving up well before it becomes clear that orders have improved.

And, we’re in no danger by getting in early.

SOLR has the best balance sheet in the industry.

They’re sitting on a cash hoard of $161 million or a $1.13 per share.  They have no debt.  And, they’re expected to generate free cash flow of $98 million this fiscal year.


Of course, as with any investment, SOLR involves some risk.

The company depends on a small number of customers for most of its revenue in any given year.  Failure to develop relationships with new customers could impact the company’s growth.

Another risk is a majority of the company’s revenue comes from Chinese companies. Changes to China’s economy, political system, or legal framework could hurt SOLR’s business.

A third risk is fluctuations in currency exchange rates between foreign currencies and the U.S. Dollar.  Because 98% of SOLR’s business is done outside the U.S., currency fluctuations can impact their financial results.

Nevertheless, we think now’s the time to pick up shares of SOLR.


The stock’s down more than 30% from its 52-week high of $9.04.  This makes for a nice low-risk entry point.

More importantly, the stock is badly mispriced by the market.

The company’s projected long term growth rate is an amazing 50% a year.  However, their price to earnings ratio is just 10 times the fiscal 2010 estimate of $0.53 per share.  That translates to a shockingly low PEG ratio of 0.20.

A PEG ratio of 1.0 implies a P/E ratio of 50.  Using this multiple, the shares are worth $26.50.  That’s a potential gain of 402%.

However, this forecast seems a bit aggressive given the current state of the industry. A more reasonable P/E ratio would be one equal to the industry average of 22.

With a P/E of 22, SOLR would be trading at $11.66.  That’s still hefty potential upside of 121%.

Based on our analysis, we see the stock trading up to at least $12.00.  Buy SOLR now for potential gains of 127% or more.


BUY GT Solar International (SOLR) up to $6.60 per share.

Recent price is $5.28.

Use a stop-loss of $2.64 on this position.

Don’t forget your position sizing and stop-loss rules.


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