What are we looking for?
Transportation companies in the United States that have positive free operating cash flow, minimal debt and have controlled operating costs over the past 12 months.
The screen
U.S. transportation companies have taken a hit over the past five quarters. After hitting a high of 630.63 in January, 2015, the S&P transportation index retraced over 30 per cent largely due to economic concerns and a depressed energy sector. The forward price-to-earnings ratio of this index has also fallen dramatically to below 10 – levels we haven't seen since 2009 and before that, 2000. Currently, the forward P/E of this index sits at 12, compared with the 10-year average of 15.6.
These cyclical companies are capital intensive and rely heavily on economic demand for raw materials and capital goods. If the global economy takes a turn to the upside, these stocks should follow. Our screen begins by identifying U.S. transportation companies that have a long-term debt-to-equity ratio less than 100 per cent and a market capitalization of more than $500-million (U.S.).
Next, we're looking for companies that have managed operating expenses over the past year. Not only must the companies have operating margins above 10 per cent, the figure must also exceed their respective five-year averages in this measure.
Finally, we're searching for companies with positive free operating cash flow, meaning the company has residual cash available after expanding or maintaining their current asset base.
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What did we find?
The results identified 10 companies in the United States that meet the screen criteria.
Sorting the list by forward P/E in ascending order, Delta Air Lines Inc. tops the list. Delta, the second-largest U.S. carrier by traffic, provides scheduled air transportation for passengers and cargo globally. Over the past five years, Delta has outperformed the S&P 500 by more than 310 per cent on a total-return basis. The company reports first-quarter results Thursday and earnings a share are expected to increase to $1.29 versus 90 cents a year ago. Although low fuel costs should benefit this bottom line number, fears of terrorism have burdened the airline industry of late.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.