Where to Invest as People Drive Less
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is constantly changing and the transportation sector is no different. Over the past couple of years high oil prices have become the new normal. Consumers are not only looking for more fuel efficient vehicles, but they are also driving less in absolute terms. The United States' population density is much lower than that of Japan or Germany which has helped to make road networks the transportation means of choice. In the midst of high gasoline prices, America's population density continues to increase which will make public transportation and other means of transport like railroads more popular. Obviously cars will continue to serve a very important role for America's transportation needs but prudent long term investors need to be aware of the changes which will impact the sector over the coming decades in order to invest accordingly.
US Population Density data by YCharts
The number of miles driven has decreased over the past couple years while the number of commuter rail miles and Amtrak miles have increased. Railroads have long lamented that they are forced to pay to upgrade and maintain their networks while the government pays for the upkeep of road networks. The recent recession has turned this situation around as governments continue to put off investments and upkeep of the road networks while railroads maintain their assets. The collapse of the I-35 Bridge in Minnesota in 2007 shows just how far parts of America’s road network have degraded.
General Motors (NYSE: GM) has had quite the news presence lately. Their bankruptcy and reorganization makes for a great story. 2011 they regained their position as the world's biggest auto producer. In a world where auto demand is unstable, being the biggest auto producer is not necessarily a blessing. GM's return on assets is only 3.7% and their return on invested capital has steadily decreased and now below that of Ford. A profit margin of 3.8% and EBIT margin of 4.7% are low in absolute and relative terms. With GM's low return on assets and the general long term instability in the auto market the firm is not very attractive.
In 2011 Ford (NYSE: F) produced close to half the number of motor vehicles as GM. Their leaner operation boasts a return on assets of 9.6% and return on invested capital which are both much healthy than those of GM. Ford's EBIT margin of 8.6% and profit margin of 13.4% are also much healthier. Even though Ford appears to be the stronger of the two, insiders are selling. Ford's management team was able to guide the firm through the 2008 recession and develop very profitable company in the midst of a competitive and cyclical industry. The fact that these insiders are selling should not be taken lightly. I believe that Ford is stronger than GM but Ford still suffers those negative macroeconomic trends which are impacting the entire auto industry.
Kansas City Southern (NYSE: KSU) has a well-developed network throughout Mexico and the Southern parts of America. Manufacturing is returning to North America and some studies project that productivity adjusted wages in Mexico will be substantially less than Chinese wages in 2015. A strong wage differential and the added transportation costs from Asia to North America should help place lower wage factories in Mexico. KSU has a strong advantage in the railroad market with its strong Mexican connections. KSU's balance sheet is healthy with a total debt to equity ratio of .53 and their profit margin of 17.3% is also reasonable. In the midst of these positive long term factors KSU is trading at very rich valuations. Their price to cash flow ratio of 14.8 and PE ratio of 22.3 are very high. For long term investors willing to dollar cost average their way into KSU should not be ignored.
Union Pacific (NYSE: UNP) has an enormous network throughout the Western and Central parts of the United States. Mexico plays a smaller part in UNP than KSU given UNP's larger size and Canadian connections but both firms are exposed to the Mexican market. UNP has relatively stronger margins and return on assets with a gross margin of 18.6%, an EBIT margin of 32.5%, and a ROA of 8.2%. Their PE ratio of 15.2 and price to cash flow ratio of 10.3 are reasonable. Long term investors will find a great company in UNP with their expansive network, high barriers, and relatively reasonable valuation.
GM Return on Invested Capital data by YCharts
Conclusion
Humans are always moving. Over the centuries our means of transportation have changed as we have developed road networks, canals, and railroads. In the age of cheap and easily available oil, cars offered cheap and versatile mobility. With the end of cheap oil the transportation network needs to evolve. The auto industry is well-known for being cyclical and it will always offer temporary opportunities to play the business cycle. Long term investors who would like to aid the in the creation of an efficient and profitable transportation system should look at railroads as strong and dependable investments.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
