It is getting harder to find good value in this market given the long market rally, slowing economic growth and rising inflation. Yet there are two transports that have underperformed the S&P by approximately 10% over the last 52 weeks, have reasonable valuations, good growth prospects, are priced 20% under analysts’ price targets and generate solid cash flow to consider.
FedEx (FDX) - FedEx Corporation provides transportation, e-commerce and business services in the United States and internationally. It operates in four segments: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. The FedEx Express segment offers various shipping services for the delivery of packages and freight. This segment also provides international trade services specializing in customs brokerage and ocean and air freight forwarding services; customs clearance services and global trade data, an information tool that allows customers to track and manage imports; and international trade advisory services, including assistance with the customs-trade partnership against terrorism program as well as publishing customs duty and tax information in various customs areas. In addition, it offers supply chain solutions, including critical inventory logistics, transportation management, fulfillment, and fleet services. The FedEx Ground segment provides business and residential ground package delivery services. It primarily serves customers in the small-package market in North America. The FedEx Freight segment offers less-than-truckload freight services as well as freight-shipping services.
Valuation and price targets - FedEx sells at around 18.5 times this year’s earnings but just 14 times 2012’s consensus. It is a long term play in the continued growth of global trade as well as a primary benefactor of a continued, albeit slow, domestic economic recovery. FDX sells at a reasonable projected PEG of 1.17 and is priced at just .76 trailing revenue. It generates prodigious operating cash flow and is selling at 9 times the cash flow it is producing. It is seeing volume growth and would benefit from a moderation in fuel prices. FDX is priced at around $91 a share. Price targets are $115 at Credit Suisse, $113 at S&P and $120 at Stifel Nicolaus.
Canadian Pacific Railway Limited (CP) - Canadian Pacific Railway Limited, through its subsidiaries, provides rail and intermodal freight transportation services. It transports bulk commodities including grain, coal, sulfur and fertilizers, and merchandise freight that consists of finished vehicles and automotive parts. The company also transports forest products, such as wood pulp, paper, paperboard, newsprint, lumber, panel and oriented strand board; and industrial and consumer products, which include chemicals, plastics, aggregates, steel, mine, ethanol and other energy related products. Canadian Pacific Railway Limited provides rail and intermodal freight transportation services over a 14,800-mile network. It serves the principal business centers of Canada, which include Montreal, Vancouver and British Columbia; and the Midwest and Northeast regions of the United States.
Valuation and price targets - CP sells for just over 15 times this year’s earnings but under 12 times 2012’s consensus. It is expected to grow revenues 12% in 2011 and 8% in 2012. It is experiencing good demand growth and should benefit from a continued economy expansion and any moderation in fuel prices. Its long term projected PEG is less than 1 and it goes for twice trailing annual revenues. It has consistently beat earnings estimates over the past four quarters and pays a dividend of 2%. CP is priced at around $61 a share. S&P and Credit Suisse have a price target of $74 on Canadian Pacific Railway.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.