Agora Financial’s Rude Awakening

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Pittsburgh, Pennsylvania

• What 100 tons of windmill power can do for your portfolio,
• When greed erodes and hope and faith in government emerges,
• A view from the peak of the world and plenty more…

Joel Bowman, safely back in Kathmandu, Nepal, reports…

This morning your editor gazed at the earth from the summit of the world’s tallest peak, Mt. Everest. Well, almost. We didn’t actually climb the thing, of course; we are much too cowardly for that. Instead, we took a twin-prop, 18-seater from the Kathmandu airport on a scenic, one-hour journey over the Himalayan range.

Even from the blurry windows of our tiny aircraft, the view was magnificent. Undulating foothills on the valley’s edge give way dramatically to sharp brown rock formations, tilted and thrust against each other to create a raging ocean of landmass. Then, what seems like only a few meters behind, giant blue and white ice caps tower majestically into the sky.

Around the halfway point of the flight, just as you approach Everest itself, passengers are invited up to the cockpit for an all-too-brief glimpse at the full panorama. Even amid its towering rivals, Everest commands all the attention. Snow drifts off its silent peak, arresting every eye aboard.

For a moment, your humbled editor was overcome with inspiration. What would it be like to really reach the summit? Is this the closest we’ll ever get? Looking down at a miniscule village, thousands of feet below us, in the blistering cold, on the edge of civilization, we decided some peaks are best viewed from a distance.

We write a lot about the phenomenon of “Peak” in these pages; Peak Oil, Peak Fear, Peak Greed…even the odd mention of the Malthusian concept of “Peak People.” The investor, like the mountaineer, acknowledges these peaks as the absolute limit, the threshold beyond which no man or market should reasonably dare to venture.

The rub here is that neither man nor market are particularly reasonable…not even by half. During a period of Peak Greed, for example, Wall Street’s herd routinely engage in death defying acts of financial base jumping, the likes of which would put most Everest climbers to shame. The game goes on until someone realizes that only a select number of chutes (the golden variety) actually open. When the crowd peers over the edge and sees the carnage below, they hightail it back down the mountain quicker than you could say, “what do you call 10,000 bankers with no parachutes?”

Enter fear.

Historically, periods of Peak Greed yield to periods of moderate caution. Cons, hucksters, shysters and their ilk are hung outside city hall and represent the widespread distrust of the investment community. When people are fearful, share prices suffer accordingly…even shares of companies that were dutifully acclimating themselves around base camp while others were swan diving off the cliff. Such is the game.

Another thing that tends to happen during the trek from Mt. Greed to Mt. Fear is that people put a lot more faith in their government.

“Unemployment is through the roof,” the crowds cry. “It’s the government’s duty to put them to work!”

“XYZ can’t go under…they’re a national icon. The politicians ought to do something.”

Then along comes their man. A rising star. He promises jobs, massive infrastructure overhauls, public works for everyone!

So then, in a period of distrust for stocks and of hope and faith in government, which companies might we expect to prosper? Perhaps a beaten down infrastructure play might be a good place to start. In the column below, our resident energy and scarcity expert, Byron King, makes the case for one company he reckons fits the bill. Details below…

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Buy Trinity Industries
By Byron King

Now that the Obama Administration is about to descend upon Washington DC, the nation’s list of “Top Priorities” will receive a makeover. I will leave it to political pundits to evaluate the pros and cons of the makeover. My beat is investing. So I will be looking for opportunity in those industries that seem most likely to prosper during the early days of the Obama Administration. Clean Energy and Infrastructure are two leading candidates…which is why Trinity Industries (NYSE: TRN. Recent price: $16.68) is one very promising stock.

Trinity is a multi-industry company. It has divisions that sell products and services to the construction, transportation, industrial and energy sectors of the economy. Trinity’s five principal business units include its Railcar, Railcar Leasing and Management Services, Inland Barge, Construction Products and Energy Equipment groups.

I’ll get to the windmill angle shortly. But first, I want to explain that each of Trinity’s business units has its own story. And this helps put the windmill tower business in perspective.

Trinity’s Railcar group has a long history of building and repairing railway cars and components. These include auto carrier cars, boxcars, gondolas, hopper cars, intermodal cars, specialty cars and tank cars. So Trinity has long experience in fabricating metal for tough outdoor jobs like railway equipment.

And Trinity’s Construction Products group has a long history producing concrete, aggregates and asphalt, as well as highway products like the beams and girders used in highway bridge construction. Thus, the Construction group has solid experience serving customers in the construction and foundation industry.

But the business group that we want to focus on is the Energy Equipment Group (EEG). The EEG manufactures large tank systems (such as propane tanks), tank containers, tank heads for pressure vessels and structural wind towers.

So the EEG capitalizes on Trinity’s long experience in building robust metal systems like rail cars and pressure tanks. And the EEG utilizes the corporate experience in the foundation and construction work that the Construction group has.

Trinity’s Energy Equipment Group produces wind towers through a wholly owned subsidiary called Trinity Structural Towers Inc. Quite simply, TSTI fabricates tubular towers, and I mean BIG tubular towers.

These tubular towers are the large poles on which the windmill turbines sit. They can be 20 or more feet in diameter at the base, and 250 or more feet high. Some of the poles even have an elevator inside, so the maintenance people can get to the top. And some of the towers are so big that you could land a helicopter on the topside platform. Is that big enough for you?

These massive towers have to be able to withstand the utmost in stress. First, there’s the windmill turbine and blades that can weigh up to 100 tons – the weight of a fully-fueled Boeing 757. And then this assembly has to handle the stress of high winds, heavy rainstorms and lightning strikes. The towers will spend the next 40 or 60 or 80 years exposed to the elements. The turbine blades at the top can be over 200 feet long and rotate at speeds of over 20 revolutions per minute. That’s a full revolution of the blade set every three seconds. And that’s one heck of a lot of stress. So only the strongest tower systems can hold up.

Just the tower foundations alone can go 50 or more feet into the Earth. And because soil and bedrock conditions change over any large area, almost every windmill tower requires its own unique engineering, excavation and construction plan.

So TSTI offers an array of services related to design, fabrication, construction, installation, testing, operation and maintenance of windmill towers and generating systems. In this respect, TSTI provides steel turbine components, concrete and aggregates, product transportation and specialized coatings that relate to wind tower design and construction. (Just the effort to transport these large tower components to the site is a logistical business in and of itself.)

TSTI operates some massive production facilities. Indeed, the TSTI plants are among the largest production facilities in North America for fabricating tubular wind towers. TSTI can fabricate to the detailed design of a turbine manufacturer like GE, Vestas or Gamesa. Or TSTI can work with customers to design and fabricate towers that meet unique criteria for both the turbine and project location.

TSTI subjects its towers to strict quality tests similar to those used for building high-pressure tanks and railway tank cars. And Trinity adds value with its extensive corporate experience (from railway cars and barges) in coating structures exposed to every conceivable weather condition. This is critical for the future maintenance and safety of the tower. After all, the tower holds up the turbine and generator. And a steady generator is the key to the overall reliability of the power system — not just of the windmill itself, but for feeding power into the overall electric grid.

Trinity is currently producing towers to support turbines as large as 2.5 megawatts, enough electricity to power about 1,750 homes ( or two average-sized Wal Mart stores). The next generation of turbines will be rated at 3 megawatts or more, and Trinity will have towers for those, as well.

Wind power currently produces a fraction of 1% of the U.S. total electrical supply. But there are plans and policies afoot to increase U.S. electric power output to more than 20% of the total supply within the next 20 years. The only way to do this is by setting big turbines onto big tubular towers. No, make that lots of big turbines onto lots of big tubular towers.

And who makes those big tubular towers? Now you know.

Trinity stock is trading at about $34 per share, down from its 52-week high of $41.15. Trinity’s market capitalization is $2.8 billion, and the company has a relatively low price-to-earnings ratio of 8.8. Demand for rail cars and barges has fallen in the past year, and this has hurt Trinity’s overall profitability. But Trinity is compensating with a fast-growing backlog of orders for windmill towers. Trinity even pays a dividend of 32 cents per share, or a yield of about 0.9%.

I expect Trinity to be a growing stock, even in a market that will be weighed down by many other negative economic and political issues going forward. By the end of 2009, Trinity could be selling for $46 per share.

[Joel’s Note: For Byron’s entire 2009 portfolio, including all recommendations and analysis, check out his latest report right here.

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[Rude Endnote: We’ll check in tomorrow with the first installment of our 2009 Predictions, Forecasts and Guesses series. Hopefully by then we’ll have reached the sunny sands of Thailand. That does require us being on time for an early flight, of course. Well, we’ll see…

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com