Best Investments: The best peak oil investments: Pure play mass transit suppliers

Sunday, October 3, 2010

The best peak oil investments: Pure play mass transit suppliers

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The Best Peak Oil Investments: Pure-Play Mass Transit Suppliers | Alternative Energy Stocks

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The Best Peak Oil Investments: Pure-Play Mass Transit Suppliers Tom Konrad CFA

I'm attempting to bring this seriesonpeakoil stocks to a conclusion in which I can choose fivestocks that should benefit from rising oil prices. One sector Ifeel should be represented is suppliers to mass transit companies, butI only looked at the percentage of revenues coming from mass transitand rail when I brought you my list of ninemasstransitstocks. From that list, the following companiesget substantially all their revenues from mass transit, passenger rail,or rail freight:

NewFlyerIndustries(NFYIF.PK/NFI-UN.TO), is the largest manufacturer of heavy-dutytransit buses in North America, and has been a long-time favorite ofmine. The company trades in Toronto under the ticker NFI-UN,which is an unusual "stapled" security consisting partly of companystock and partly of a high-yield bond, giving it a much higher yieldthan most other companys. This makes apples-to-apples comparisonswith different stocks difficult, but I'll do my best.VosslohAG(VOS.DE) supplies rail fastening systems,switching, services, and both diesel and electric locomotives,including locomotives for high speed rail. Their electricalsystems unit supplies electric drivetrains for both locomotives andtrolley buses.
While Portec RailProducts (PRPX) is a pure-play rail supplier, I'm not going toinclude it in this comparative valuation because the stock is currentlytrading based on the a takeoveroffer from L. B.Foster (FSTR). This offer is on hold pending a ruling fromthe US Department of Justice, but L.B. Foster is confident enough ofobtaining final approval (after some asset dispositions) that they increasedtheoffer price to $11.80 per Portec share and agreed to pay $2 millionto Portec if they are unable to consummate the deal by the end ofthe year in order to induce Portec to extend the agreement when theoriginal offer expired on August 30.WabtecCorporation(WAB), primarily serves the freight and passengerrail industries, supplying braking and other safety systems for bothrail cars and locomotives.One last company I will add to the list is the Spanish firm Construccionesy Auxiliar de Ferrocarriles (CAF.MC), also known as CAF. Areader suggested I look into CAF shortly after the publication of theoriginal list of transit stocks. CAF manfactures railway cars,components, and complete turnkey rail systems. In 2009, 58% ofrevenues came from Spain, rapidly growing international operationsaccounting for the balance of 43%.

Valuation and Liquidity

The following table lays out several important valuation and liquidityratios for these companies:

Company
New Flyer
Vossloh
Wabtec
CAF
Ticker
NFI-UN.TOVOS.DEWABCAF.MCShare Price9/7/2010
C$11.51
€80.18US$45.84
€345.15
FinancialStmtDate
6/30/2010
6/30/2010
3/31/2010
12/31/2009
TTM EarningsYield
0.05%
9.1%
5.1%
10.5%
P/E
218
11.0
19.4
9.5
TTM Free CashFlow Yield
6.6%
5.1%
0.1%
-0.7%
Dividend Yield
10.2%*
2.5%
0.1%
3.0%
NetDebt/Equity
5.75
1.5
0.8
3.8
CurrentRatio
1.35
1.6
2.4
1.1
YoYSalesGrowth
2.6%
14%
4%
25%
* Note: The yield on New Flyer's securities is not comparable to theother numbers in this chart because it includes the value of interestpayments on the debt portion of the security

The only one of the four I currently own is New Flyer. The busmanufacturer is returning to profitability after a year of lossescaused by the downturn and an unexpected delay in an order from a largecustomer. This has caused fairly strong price appreciation forwhat I consider an income security, so I have recently sold a littleover a third of my holdings in order to rebalance my portfolio.

Wabtec and CAF both show weak free cash flow. For Wabtec,this reflects a temporary surge in investment to support future growth. In my opinion, Wabtec's strong balance sheet, with its low debtand a strong current ratio, should be sufficient to sustain thisplanned surge in investment.

CAF's low free cash flow seems to reflect a surge in working capitalwith the build-out of current projects. Since CAF contracts tobuild entire turnkey transit facilities, large surges in workingcapital requirements are part of its normal course of business.

Vossloh seems the best overall value of the four, with an inexpensiveprice/earnings ratio of 11, decent growth and dividends that are wellcovered by income and cash flow. The company does not haveexcessive debt, and maintains a moderate liquidity buffer.

Conclusion

Vossloh AG seems like the best buy of these four at currentprices. The conservatively managed balance sheet and moderatePrice to Earnings ratio of 11 mean this company should be able toweather continued economic weakness, while still being able to benefitfrom any potential increased investment in mass transit systems.

DISCLOSURE: Long NFYIF and PRPX.DISCLAIMER: The information and tradesprovided here are for informational purposes only and are not asolicitation tobuy or sell any of these securities. Investing involves substantialrisk and youshould evaluate your own risk levels before you make any investment.Pastresults are not an indication of future performance. Please take thetime toread the full disclaimer here.

Posted by Tom Konrad on September 20, 2010 08:45 AM | The Best Peak Oil Investments: Pure-Play Mass Transit Suppliers

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