By Renee Ann Butler
Services companies don't get a whole lot attention but they should. Included in this sector are the companies that lease equipment, provide shipping services and keep industrial equipment in top shape. They help keep other companies running and, given their unique roles, services companies are not as reactive to trends or fads -- after all, the United Parcel Service (UPS), for example, doesn't care which companies are using its services as long as its revenues stay consistent.
There are 4 companies in this sector right now that I think are significantly underpriced. Let's look at each in turn.
Ryder System, Inc. (R) is a $2.23 billion market cap rental and leasing services company with a forward price to earnings ratio of just 9.16. While its EPS did shrink by about 4% a year on average over the past five years, analysts are expecting the company to grow its earnings by an average rate of 10.3% a year over the next five years. Ryder should be positively affected by upcoming improvements in the economy which should build in momentum and allow the company to continue to improve its supply chain and dedicated units, such as its current initiative over 2012 and 2013 to improve its fleet. Further, the current trend of moving away from in-house fleet services, instead outsourcing those activities to companies like R in a bid to save money, should also help the company. Jeffrey Vinik's Vinik Asset Management and David Dreman's Dreman Value Management are fans of R.
FedEx Corporation (FDX) has a $28.16 billion market cap and is priced at 12 times its future earnings. The air delivery and freight services company's earnings fell 4.74% a year on average over the past five years but the consensus estimate is that FDX will be able to boost its earnings by more than 15% a year on average over the next five years. FDX is set to explode as it develops its presence in the home delivery business further and more people look to have things delivered. The company is building its market share and that, in turn, is going to help build its bottom line. There are some issues facing the company involving personnel, pension costs and the rising cost of maintenance but this should be offset by FDX's increased market share. Mason Hawkins' Southeastern Asset Management is very bullish on FDX, with a stake in the company valued at roughly $1 billion.
Kirby Corporation (KEX) is a $3.09 billion shipping company. It is the largest domestic operator of inland tank barges that transport petroleum, industrial chemicals and other products. Right now, it is trading at 12.43 times its future earnings. KEX is a very consistent earner. Over the past five years, the company's EPS has increased at an average rate of 13.24% a year and analysts expect that rate to continue over the next five years, falling slightly to 11.46% a year on average. KEX has a lot fueling these numbers, including contributions from recent acquisitions and mounting strength in both the petrochemicals and diesel engine power generation markets. Between higher term contract renewals and the low price of natural gas, utilization should increase, in turn pushing the demand for KEX's services up. Royce & Associates, JAT Capital Management and Citadel Investment Group are favorable about this company.
WESCO International (WCC) is an industrial equipment wholesaler with a market cap of $2.66 billion. It has a forward price to earnings ratio of 11.17 and, while its earnings did decline slightly over the past five years (slipping less than 1% a year on average), analysts predict WCC will be able to grow its earnings by an average rate of 12.35% a year over the next five years. The company has somewhat low profit margins but it also has an impressive record of EPS growth, strong revenue growth and reasonable debt. Alan Fournier's Pennant Capital Management and Alexander Mitchell's Scopus Asset Management like WCC.