Trains, Planes and Automobiles
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Getting into the spirit of this rally, I want to buy some cyclical transport stocks--but where do I look? There are currently different arguments for buying into the different transport sectors. For instance, the growth forecasts over the next decade or so in the aviation industry are astronomic. Boeing (NYSE: BA) believes China will need 5,260 new aircraft valued at $670 billion over the next 17 years. It is also expected that there will be an additional 877 million global air travelers flying in 2015 compared to 2010.
This is all good new for Boeing, as one of the two most prominent aircraft manufactures in the world. But is Boeing the best investment I could make? Well, currently I doubt it. The company has produced less than stellar earnings over the past 5 years, with EPS growth of only 13.4%, a rate of roughly 2.7% a year. The share price leaves much to be desired as well, with the price currently under-performing the S&P 500 by 10% over the past 5 years. Boeing is also suffering from significant defects in some of its planes, and the most recent sent the shares down 5% very quickly. Oh and while I write this Japan has suspended all new Boeing Dreamliner flights pending an investigation into safety, after numerous defects and emergency landings - certainly not a good thing if you want to make an investment.
So aircraft investment could be out, leaving just rail and car. The rail industry is by far one of the hardest industries to play. Although I want to play a recovery of the economy, railroads will only recover if the goods they carry are in demand. All of the railroad companies got a shock last year when coal demand fell due to the low price of natural gas, and this slump caused a significant hit to revenues. CSX (NYSE: CSX) was the hardest hit, as around 31% of its revenues stem from coal. UNP (NYSE: UNP) is the largest railroad company in the US, and it offers the most diversified amount of products hauled. Buying stock in UNP would benefit from a resurgence in Industry (15% of revenue) and Cars (10% of revenue). The company also derives 20% of its revenue from hauling agricultural products, which are going to be in demand in greater and greater quantities.
In a financial respect UNP trades at a premium to the rest of the sector on a forward earnings multiple of 14, rather than the sector average of 11.5. However, the reason for this is clear, as the company has the company has significant advantages over its competitors. For a start, despite the diversification mentioned above, UNP produces a return on investment of 10% compared to CSX, who trails behind on a ROI of only 7%. UNP also has a significantly lower debt level - UNP has around a 0.5 equity level, compared to CSX, which has debt to equity level of 100%. Furthermore, UNP is forecast for double digit earnings growth next year, whereas CSX is putting up with low single digit growth.
Despite UNP's many plusses, my star pick for the railroad group for growth at a reasonable price would have to be Norfolk and Southern Corp. (NYSE: NSC). Currently right in the middle of the group, the firm's main allure is its dividend at 3% and its decent return on equity of just under 20%. The company provides a ROI of around 7% and is trading on a forward earnings multiple of 11.5. Norfolk and Southern has a debt to equity level of 0.8 and a predicted growth rate of high single digits. Overall, a middle ground pick.
The railroads present investing opportunity, but what about automobiles? To be honest I nearly brought Ford last year when the stock was trading below $10 - and I believe the stock is worth much more even now. Ford is trading on an earnings multiple that is a quarter of the sector average and a price to sales ratio that's half of the sector average. The company has also seen a significantly lower decline in sales than the rest of the industry over the past five years. Although Ford has a debt to equity ratio of nearly 5x, the company does have an above average quick ratio of 1.7, so it looks secure for the next 12 months at least.
Despite these ok metrics I do not want to own Ford. Instead, my choice automobile stock would have to be Volkswagen AG (NASDAQOTH: VLKAY). Volkswagen's brands include Volkswagen, Audi, Bentley, Bugatti, Lamborghini, SEAT, Skoda, Scania and Volkswagen Commercial Vehicles. From high range super cars to low cost fuel efficient hatchbacks and trucks, the company has it all. The luxury range and product diversification really shows through here - in 2011 the company produced 30% return on equity and a 15.5% EBITD margin! Despite these amazing profitability figures the company is still trading on a rock bottom valuation figure - like the majority of industrial stocks in Europe that have been sold off on Eurozone worries. Volkswagen is forecast to report EPS growth of nearly 50% for 2012 and is trading on a forward P/E ratio based on the EPS growth figure of 3.7.
Despite the rest of the market worries, the best stock in the group appears to be Volkswagen. Neither the railroad or airline stocks appear to have all the traits I look for in a decent industrial value play. In addition, the railroads and the airlines both come with a significant amount of external risk. On the other hand, Volkswagen has access to both luxury and low end markets, has worldwide sales growth, and the stock price is not an under-performer.
RupertHargreav has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. 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!