What are we looking for?
With the war in Iran driving the price of oil up, we wanted to look at valuations for transportation companies. These companies move us and our goods across the country and around the world. Our search includes companies that deliver by air, rail, water and road.
The screen
We used StockCalc’s screener to select the top 10 transportation companies listed by market capitalization on the Toronto Stock Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- a price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- an adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- if we have analyst coverage, we may look at the consensus target price.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code ‘Globe30’, which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent close price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from our models and analyst target data if used.
Fuel represents a large percentage of the expenses these companies deal with, and with the recent run-up in oil prices it is helpful to look at fuel expenses as a percentage of total revenue for these industries. For airlines we see 23 to 24 per cent of total revenue is spent on fuel, making this industry the most vulnerable to rising oil prices.
Railways are next with 12 per cent of total revenue spent on fuel, but railways (and truck transport) have significant surcharge recoveries. A fuel surcharge recovery is a variable fee added to freight rates that adjusts with diesel prices, and is designed to protect carriers from fuel price volatility.
The American Transportation Research Institute (ATRI) tells us for every US$2.26 cost per mile, 48 US cents or 21 per cent is allocated to fuel before recoveries in the trucking industry. Finally, we found marine shipping has a fuel cost of about 9 per cent of total revenue. Ferries and short-haul marine transport have a much higher value – that is, fuel expenses as a percentage of total revenue – than that, upward of 20 per cent.
Given the large value of assets they employ, transportation companies have high debt levels and high associated fixed costs. Those debt levels and their operating proficiency with those assets (operating ratio) have a direct bearing on valuation. The high fixed costs can be a barrier to entry which keeps potential competitors out. These companies also have large work forces and have been experiencing wage and inflationary pressures over the past few years. From a dividend perspective, three of these 10 stocks have dividend yields over 4 per cent. Also of note, the average one-month return for these stocks is minus 7 per cent, with a range of plus 5 per cent (WTE-T) to minus 18 per cent (TFII-T and AC-T)
Let’s look at a couple of these companies:
Air Canada (AC-T) provides domestic, U.S. transborder, and international airline services. The company, which had one of its aircraft involved in a deadly accident at New York’s LaGuardia Airport late Sunday, provides scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand names in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada. As of Dec. 31, 2024, it operated a fleet of 212 aircraft under the Air Canada brand name. Air Canada was founded in 1937 and is headquartered in Saint-Laurent, Que. Our models show there’s upside to the current price from here.
Westshore Terminals Investment Corp. (WTE-T) operates a coal storage and loading terminal at Roberts Bank, B.C. It has contracts to ship coal from mines in British Columbia, Alberta, and the United States. Our models for Vancouver-based Westshore, which was founded in 1970, are showing WTE-T as slightly undervalued.
Mullen Group Ltd. (MTL-T) provides a range of trucking and logistics services in Canada and the United States. It operates through four segments: Less-Than-Truckload, Logistics & Warehousing, Specialized & Industrial Services, and U.S. & International Logistics. Mullen Group Ltd. was founded in 1949 and is headquartered in Okotoks, Alta. Our weighted model shows MTL-T as fairly valued.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.