The transportation sector is the lifeblood of the global economy — but a glance at a chart of the highs and lows of this cyclical sector can look a lot like the surface of a stormy sea. 

Take the Baltic Dry Index, for example — it began the year at record lows but has more than doubled in the past few months. 

Out-of-favor industries attract value investors who are looking for a bargain and this upswing in the index could be the beginning of a trend reversal, as the transportation sector is often seen as a leading indicator. A classic value story is beginning to take shape, and investors are climbing aboard.

Global trade is suffering due the widespread downturn, and the shipping sector has taken a dive from its highs less than a decade ago. Nervous businesses have curbed trading activity, keeping demand for shipping lines low. For 2013, global container trade growth is expected to be around 4.7%, rising to 5.7% in 2014. 

That growth is what makes a company that’s lowering costs and increasing revenues by 6.4% from the same quarter last year worth a closer look. TAL International Group (NYSE: TAL) is a lessor of intermodal containers used to transport freight by ship, rail or truck. #-ad_banner-#

In an industry where utilization rates average around 95%, TAL stands out with rates over 97%. This means very little capacity is left unused, which gives TAL an impressive return on equity in excess of 20%. 

The company is improving margins as well by refinancing several credit facilities in the past quarter. TAL’s interest expense fell by $3.3 million, lowering its effective interest rate nearly a full percentage point to 3.8%. Gross margins are in excess of 88%, improving from last quarter’s 79%.

TAL prides itself on its high-quality lease portfolio. More than three-quarters of the containers it leases are under long-term contracts averaging 42 months. This gives the company a higher than average utilization rate while also limiting its exposure to potential defaults. Management’s strategy of higher quality over quantity has given the company an edge in softer markets where defaults threaten its competitors. 

TAL’s biggest competitor, Textainer Group Holdings (NYSE: TGH), is similar in many respects and should also benefit from improving international conditions. There are slight differences in valuations and utilization rates, but TAL is currently the better company. 

Textainer missed earnings last quarter by an extraordinary 29% mostly due to a number of lease defaults by several clients. That debt will keep Textainer from posting better earnings for the foreseeable future, but the stock should improve considerably when the debt is paid.

TAL trades at just 12 times earnings and has had earnings per share (EPS) growth of around 27% for the past five years. The stock offers a dividend of $2.80 a share, an increase of 172% since 2010. The dividend yield of 5.1% is supported by a payout ratio of just 44%, giving the company plenty of capital to continue to invest in the business.

Risks to Consider: Shipping companies carry large debt loads to finance operations and are sensitive to interest rate changes. Improving global conditions could well act as a catalyst, but the stock could remain stagnant going into 2014 until we see more positive economic news out of Europe. 

Action to Take –> The stock has posted gains of 54% for the year, with most of that within the past few months. The stock could be due for a pullback, and savvy investors will have the opportunity to buy this value stock at even cheaper levels. Look to pull the trigger under $52.

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