Ten transportation stocks to monitor amid rising oil prices

The world of transportation is undergoing a significant transformation, especially as global events influence oil prices. This creates a ripple effect across various sectors, particularly those involved in the movement of goods and people. Understanding which transportation stocks are poised to perform well during these fluctuations can provide valuable insights for investors.

Evaluating the Transportation Sector in a High Oil Price Environment

The recent surge in oil prices, largely driven by geopolitical tensions in the Middle East, has prompted a closer look at the transportation industry. This sector is crucial as it encompasses a wide array of companies responsible for delivering goods and passengers both domestically and internationally. The primary focus is on those companies that utilize air, rail, maritime, and road networks for their operations.

As fuel costs comprise a substantial portion of operational expenses, companies in this sector are particularly vulnerable to changes in oil prices. Analyzing their stock performance during periods of rising oil prices can yield insights into which companies are managing these challenges effectively.

Utilizing Screening Tools for Stock Selection

To identify promising transportation stocks, we employed StockCalc’s screening tools, selecting the top ten transportation companies based on their market capitalization on the Toronto Stock Exchange. This approach allows for a focused assessment of companies that are not only significant players in the market but also have the potential for robust performance.

The valuation process incorporates several critical methods:

• Discounted Cash Flow (DCF): This technique involves projecting future cash flows and discounting them back to present value to derive a value per share.
• Price Comparables: This method values a company based on ratios derived from similar companies in the industry.
• Adjusted Book Value (ABV): This value is calculated by multiplying the book value per share by its average price-to-book ratio over the past decade.
• Analyst Consensus Target Price: For companies with analyst coverage, the consensus target price may also inform valuation.

Understanding StockCalc and Its Tools

StockCalc is a robust platform designed for fundamental valuation, offering a suite of tools that help investors analyze and report on stock values for numerous public companies listed on major North American exchanges. Through its detailed analytics, investors can gain a clearer understanding of the intrinsic value of their investments.

For Globe Unlimited subscribers, there’s an opportunity to access StockCalc with a promotional code offering a 30-day free trial, followed by special pricing for the subsequent month, enhancing accessibility to these valuable tools.

Key Findings on Transportation Stocks

The analysis yielded interesting insights into the relationship between stock prices and intrinsic values. A comparison table reveals the percentage difference between the closing prices and intrinsic valuations of these transportation stocks. The "StockCalc Valuation" column provides a weighted calculation based on our models and available analyst data.

Fuel expenditures constitute a major aspect of operational costs across different segments of the transportation industry:

• Airlines: Approximately 23-24% of total revenue is allocated to fuel, making airlines the most sensitive to oil price fluctuations.
• Railroads: Fuel costs represent about 12% of total revenue. However, rail and truck transport benefit from fuel surcharge recoveries, which help mitigate the impact of rising fuel prices.
• Trucking Sector: According to the American Transportation Research Institute, fuel costs account for about 21% of operational expenses, translating to 48 cents per mile for a total cost of $2.26.
• Marine Transport: Fuel expenses are around 9% of total revenue, although ferries and short-haul marine transport can see figures exceeding 20%.

Challenges Faced by Transportation Companies

Transportation companies operate with significant assets, which often leads to high levels of debt. This financial structure, combined with high fixed costs associated with operations, creates barriers to entry for potential competitors. Additionally, these companies employ large workforces that have been impacted by wage increases and inflationary pressures in recent years.

From a dividend perspective, it’s notable that three of the ten selected stocks offer yields exceeding 4%. However, the average one-month return for these stocks currently sits at -7%, with fluctuations ranging from +5% to -18% in certain cases.

Spotlighting Notable Companies in the Sector

Examining specific companies within this framework reveals a variety of opportunities:

• Air Canada: A major airline providing both domestic and international services. Despite recent challenges, including a high-profile incident at LaGuardia Airport, our models suggest potential for price appreciation.
• Westshore Terminals Investment Corp: Specializing in coal storage and loading, this company has displayed slight undervaluation according to our models. Its operations are vital for transporting coal from key mining regions.
• Mullen Group Ltd: Offers a wide range of trucking and logistics services across Canada and the United States. With a comprehensive operational structure, it is currently assessed as fairly valued.

In summary, the transportation sector presents a complex landscape shaped by fluctuating oil prices and operational challenges. For investors, understanding the dynamics of this industry and identifying undervalued stocks could yield significant advantages in a volatile market.

Note: Investing entails risks, and the insights provided here are based on analysis using StockCalc's tools. Users are encouraged to conduct their own research and consider their risk tolerance before making investment decisions.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech company based in Miramichi, N.B.