We are continuing our Hold on CAI International, Inc. (CAP), but cutting our target price to $15.50. CAP posted second quarter diluted EPS of $0.37, up 58% year-over-year and above both consensus and our estimate of $0.32, largely reflecting higher-than-expected revenue growth.

Despite this, we are maintaining our diluted EPS estimates at $1.40 for 2008 and at $1.70 for 2009, as the company sold additional shares in mid-August. Results should benefit from strong gains in revenue due to improving container utilization and growing container demand and a reduction in the effective tax rate, as well as the acquisition of Consent Equipment AB, a European container leasing company, expected to add $0.07-$0.10 per share in 2008. CAP pays no dividend.

Cargo volume will continue to grow at double-digit rates through 2009 and to sub-10% growth from 2010 annually due to the continuing shift in global manufacturing capacity to lower labor cost regions such as China and India, the continued integration of developing high-growth economies into global trade patterns, the continued conversion of cargo from bulk shipping into container shipping and the growing liberalization and integration of world trade.

Despite the many positives of the CAP story, we also have concerns about future results, chief among these being concentration risk. On the other hand, per diem rates may be negatively affected by the entrance of new leasing companies, overproduction of new containers by manufacturers, and over-buying of containers by container shipping lines and leasing competitors.