Seeking Alpha
Long/short equity, research analyst, portfolio strategy, small-cap
Profile| Send Message|
( followers)  

Summary

  • Student Transportation Inc. signs up to decade-long contracts with school districts that secure a guaranteed income flow for the life of the contract.
  • Price to earnings are at 157.25 and forward price to earnings are at 104.83. Price to sales are at 1.11 and price to book is at 3.16.
  • Trading at earnings multiples of 157 and 104 times future earnings is extremely overvalued.

As the market continues to move higher and close at new highs on a daily bases, investors continue to remain cautious. Stocks continue to look overvalued and government data has been supportive as of late, but I believe there is a serious potential problem brewing in the housing market. According to an article published recently on MarketWatch.com, half of Americans are finding that they cannot afford their housing payments. Sound familiar? Housing prices are up over 20 percent over the past two years and renters/mortgage payers are finding the higher premiums hard to swallow.

While the housing increase certainly has helped bring many Americans out of negative equity on their houses, one must seriously remain cautious if housing prices continue higher. As cracks continue to slowly appear more and more in the markets, investors must balance their portfolios to catch the additional upside while protecting from the inevitable decline ahead. One stock that we will look at today is a monthly dividend payer and is a popular pick in the space; Student Transportation, Inc. (NASDAQ:STB). This Canadian company is the operator of chartered school buses across Canada and the U.S. In fact, Student Transportation is an overwhelming leader in the space of student transportation.

Turning to the fundamentals, Student Transportation has a market cap of $518.67 Million and is currently rated a 'light buy' by analysts. Price to earnings are at 157.25 and forward price to earnings are at 104.83. Price to sales are at 1.11 and price to book is at 3.16. Earnings are expected to decline 20 percent this year, but rise 50 percent next year. The company pays a total annual yield of 8.11 percent and is up 7.5 percent in the past year and 5.18 percent year-to-date.

The attractive part of Student Transportation is that the company signs up to decade-long contracts with school districts that secure a guaranteed income flow for the life of the contract. This proves to be a very enticing business model during recessions and downturns. Additionally, the company is continuing to expand with various new contracts recently awarded in the U.S.

The business may be on solid ground, but the stock is another story. Trading at earnings multiples of 157 and 104 times future earnings is extremely overvalued. The stock has been in a steady uptrend since February and one must be cautious of a correction considering the seriously overvalued state of the stock. The reasoning behind the overvalued nature is that investors turn to stocks such as Student Transportation during times of distress and uncertainty because of its contract-structure and monthly dividend. I would recommend that prospective investors steer clear for now, until the valuation comes down a bit. Be sure to do your own research before investing.

Source: Tread Lightly On This Overvalued Dividend Stock