What are we looking for?
The U.S. holiday season, including Thanksgiving in late November, is known to benefit some industries on the stock market. One of them is the shipping industry, which is also helped by the growing percentage of consumers shopping online. Of course, there is no guaranteed pattern, but we thought it would still be interesting to compare a few major players in this industry.
We have isolated the air delivery and freight services stocks from our U.S. universe and used the following eight criteria to cover economic performance, growth and risk.
- Economic performance index, or EPI (return on capital divided by cost of capital). An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- Return on capital;
- Return on equity. The ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.
- Future growth value (FGV). The FGV represents, in percentage, the portion of the total market value that exceeds the company’s current operating value. The higher the number, the higher the baked-in premium for expected growth is, and the higher the risk;
- Free cash flow-to-invested capital ratio. This metric gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent;
- One-year sales growth;
- Beta. A stock with a beta greater than one is considered more volatile than the market; less than one indicates less volatility;
- Debt-to-equity ratio (leverage).
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
We focused our screen on the top eight companies by market capitalization. The highest economic performer of the group is C.H. Robinson Worldwide, with an EPI of 3.86. CHRW combines many attributes investors should find interesting: a very high ROC and ROE, a dividend yield of 2.5 per cent, a healthy balance sheet and a low beta of 0.28. It is also one of the stocks with the lowest baked-in premium (FGV of 18 per cent). This means as long as C.H. Robinson is able to grow (revenues, profits) by 18 per cent, we are not overpaying for the stock.
As you can see, the more popular stocks such as United Parcel Service and FedEx carry much larger premiums, at 34 per cent and 47 per cent respectively, which sets the bar much higher and increases the chances of overpaying for the shares.
For investors who can tolerate more risk (higher beta, leverage), XPO Logistics could be an interesting option. This much smaller company – compared with UPS and Fedex – is in full growth mode with a 278 per cent revenue increase in one year and offers a decent economic performance given its size.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.