3 Fast Growing Companies To Get Your Portfolio Moving
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are certain industries that directly benefit from an improving economy. With the Federal Reserve committed to QE3, domestic transportation companies should directly benefit from higher demand in the end. To find a good play on this impending higher demand, I wanted to look at mid-cap stocks first. While larger players like FedEx, or railroads like CSX might make some sense, they don't generally grow as fast as their smaller compatriots. Using the Fool.com CAPS Screener, I've identified three companies that look like good choices to capitalize on this fast growth.
To weed out the slower growing players in the transportation industry, I asked the screener for at least 10% revenue growth and 20% EPS growth over the last three years. Among others the screen returned, companies I want to look at are: J.B. Hunt Transport Services (NASDAQ: JBHT), Kansas City Southern (NYSE: KSU), and Old Dominion Freight Lines (NASDAQ: ODFL). Each of these companies meets our above criteria, and analysts are looking for at least 15% EPS growth going forward as well. Let me walk you through why each company looks like a good value to me.
J.B. Hunt Transport Services:
J.B. Hunt is a fixture on the American road. In fact, it's hard for me to remember a time when I didn't see a J.B. Hunt truck on the highway when traveling. The company has over 4,500 company owned trucks, 330 that are customer owned, and 17 run by independent contractors. This gives J.B. Hunt the ability to bring trucks in or out of service depending on demand. Based on analysts predictions, demand is expected to be strong over the next few years. The average analyst is calling for nearly 20% earnings growth over the next five years, which helps to explain why the stock sells for about 22 times forward earnings estimates. The company has a decent history of beating estimates as well, and in the last year has reported earnings that outpaced estimates by about 3% per quarter. The company operates in a very cash intensive industry which makes large cash flow tough to come by, but as J.B. Hunt grows it should be easier to spread their costs across a larger base. The company's balance sheet is also a bit weak, with a debt-to-equity ratio of 0.81. For investors who realize that truck delivery will become more important as businesses expand over the next few years, J.B. Hunt could be an attractive choice.
Kansas City Southern:
Kansas City Southern operates about 6,200 rail miles in the middle and southeastern U.S. The company's yield won't win a prize for highest payout at about 1%, but the dividend is well covered. In fact, Kanas City Southern should be able to increase its payout with a free cash flow payout ratio of just under 39%. Analysts expect about 16% growth in the next several years, and the company might do even better than that. The company has beaten estimates three of the last four quarters by about 2.4% each time. The market is obviously impressed with the company's performance with the stock selling for about 22 times forward estimates. The biggest difference between Kansas City Southern and J.B. Hunt is K.C.S. generates much more free cash flow. In fact, though K.C.S. is much smaller, the company generated about $0.10 of free cash flow per $1 of sales versus $0.13 of free cash flow at Union Pacific. This is another case where size ultimately matters, and as K.C.S. gets larger their cash generation capabilities should improve. Though the stock isn't necessarily cheap, it could be an attractive long-term play as rail transportation is efficient and a better economy means more moving down the line.
Old Dominion Freight Lines:
Old Dominion is sort of an in-between play for investors looking to buy stock in a transportation stock that will benefit from smaller payloads than a railroad or a traditional long-haul trucker. The company operates over 5,800 tractors, 16,000 small trailers, and over 6,000 vans. The biggest difference between J.B. Hunt and Old Dominion is Old Dominion goes where J.B. Hunt doesn't normally. The other difference between the two is while J.B. Hunt pays a small dividend, Old Dominion currently does not. While analysts are calling for about 16% earnings growth in the next five years, and the stock sells for about 15 times forward estimates, there is one problem. Old Dominion is somewhat inconsistent in generating free cash flow. In two of the last three years, the company has been free cash flow positive. In two of the last four quarters, the company has been free cash flow positive as well. While one could argue that the company is spending money to expand its business, this is something for investors to keep an eye on. Even though the company's cash flow hasn't been consistent, the good news is the company's debt-to-equity ratio is still a relatively low 0.24.
Many investors make the mistake of only looking at larger companies for investment ideas. However, mid-caps. can offer the stability of an established company with the better growth of a smaller player. With two trucking companies and a railroad to choose from, any of the above companies could be a good way to benefit from an improved domestic economy. Use this information as a starting point for your own research, and see if one of these companies might be the way to get your portfolio moving down the road to better returns.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.