Is Jardine Cycle & Carriage Limited A Cheap Blue Chip?

Looking at the price-to-earnings (PE) ratio – a measure of how much we are paying for each dollar of a company’s profit – the conglomerate Jardine Cycle & Carriage Limited (SGX: C07) seems to be cheap when compared against the broader market.

Currently, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), is valued at around 13.5 times its trailing earnings based on data from the SPDR STI ETF (SGX: ES3). The SPDR STI ETF is an exchange-traded fund which mimics the fundamentals of the Straits Times Index.

At a trailing PE – where a company’s current price is divided by its earnings over the last 12 months – of 12.7, Jardine Cycle & Carriage can thus be said to be less pricey than the market.

But, that alone can’t give us the full picture and that’s where a look back in history can help. Here’s how Jardine Cycle & Carriage’s PE ratio has changed over the last 10-plus years since the start of 2004:

Jardine C&C Pe ratio chart

Source: S&P Capital IQ

From the chart, we can see that Jardine Cycle & Carriage’s current PE ratio of 12.7 is higher than its historical average of 10.9 over the past 10-plus years – that might mean the company’s actually not that cheap.

However, it’s good to point out that looking at PE ratios this way has its disadvantages. This is how investor Ric Dillon describes it (emphasis mine):

“On the behavioural-finance side, one of many inefficiencies comes from people anchoring on the past. People assume something is cheap, say, just because it hasn’t traded at such a low valuation for five or ten years. But that doesn’t matter, what matters is what will be.”

If we take the other side of the equation, what this means is that Jardine Cycle & Carriage can still be cheap if it can grow its earnings substantially in the future even if it’s trading at a valuation that does not look cheap historically.

The main bulk of Jardine Cycle & Carriage’s profit comes from its 50%-owned Indonesia-based subsidiary Astra, which is itself a conglomerate. And, there are signs that Jardine Cylce & Carriage might get to enjoy some strong long-term tailwinds due to: 1) favourable population demographics in Indonesia which are positive for economic growth; and 2) economic reforms which newly-elected President, Joko Widodo, is trying to drive through (though there are admittedly political difficulties in doing so).

Given that Astra’s Automotive segment is its main profit contributor and that it enjoys market dominance (Astra held a 54% market share in Indonesia’s automotive market in 2012 according to Frost and Sullivan), any sustained long-term growth in Indonesia’s economy would likely benefit Astra, and in turn Jardine Cycle & Carriage.

Foolish Bottom Line

Although there’re things to like about Jardine Cycle & Carriage’s future, there’re also risks investors have to note. For instance, future currency fluctuations involving the rupiah, US dollar, and Singapore dollar (Astra conducts its business using the rupiah; Jardine Cycle & Carriage reports in the US dollar with its shares being traded in the Singapore dollar) is an important risk to consider – a significant and prolonged devaluation of the rupiah against the other two currencies might wipe away any of Astra’s rupiah-denominated growth in the future after factoring in exchange rates.

Jardine Cycle & Carriage also carries a heavy debt-load (US$1.51 billion in cash versus US$5.42 billion in borrowings as of 30 June 2014) on its balance sheet, which adds to its financial risks. Investors would thus have to weigh the risks and rewards in order to make an informed investing decision.

At the very least though, Jardine Cycle & Carriage’s lower-than-market-average PE ratio could make it a worthwhile target for further study.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.