Land transport outfit ComfortDelGro Corporation Limited (SGX: C52) has been a standout performer amongst the 30 constituents of the Straits Times Index (SGX: ^STI).
Over the past 12 months, ComfortDelGro?s shares have gained some 50% in price, making it by far the best-performing blue chip with Singapore Airlines Ltd (SGX: C6L) sitting in a distant second with a (still very impressive) 34.5% increase in share price.
After such strong gains, it?s perhaps fair to ask: What?s in store next for ComfortDelGro’s shares?
An elevated valuation
For some answers, we can perhaps turn to the firm?s current valuation.
Over the past 12 months, ComfortDelGro’s shares have gained some 50% in price, making it by far the best-performing blue chip with Singapore Airlines Ltd (SGX: C6L) sitting in a distant second with a (still very impressive) 34.5% increase in share price.
After such strong gains, it’s perhaps fair to ask: What’s in store next for ComfortDelGro’s shares?
An elevated valuation
For some answers, we can perhaps turn to the firm’s current valuation.
Source: S&P Capital IQ
The chart above plots out ComfortDelGro’s trailing price-to-earnings (PE) ratio going back to 1 January 2005.
And as you can see, the transport outfit’s current PE ratio of 22.4 (at yesterday’s closing price of S$2.94) is the highest it’s ever been over the past decade and is a fair bit higher than the long-term average PE ratio of 15.5 stretching back to the start of 2005 – that might mean the company’s shares are actually not that cheap at the moment.
A comparison of ComfortDelGro’s current valuation with that of the broader market also points to the same conclusion; at the moment, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the Straits Times Index – has a trailing PE ratio of 13.8.
It’s also worth noting that ComfortDelGro’s PE ratio has been on a steep ascent since January 2014, meaning to say that the bulk of the transport outfit’s share price gains over the past 12 months have been due to an expansion in its PE ratio.
Put another way, it appears that ComfortDelGro’s impressive returns have largely been the result of growing enthusiasm in the market over the firm’s future growth prospects.
This brings me to the firm’s business future, keeping in mind that companies with high valuations can still be great investments – provided their future business results do exhibit great growth that’s commensurate with the high expectations.
Troubled by slowing growth
Unfortunately, this is where ComfortDelGro may possibly fall short.
ComfortDelGro’s main bread and butter is in the provision of bus, rail (think trains), and taxi services. It counts Singapore as its main geographical market, though the United Kingdom, Australia, and China are also important geographies for the company.
Over ComfortDelGro’s past five completed-financial years (the firm’s financial year actually coincides with the calendar year), growth in annual earnings per share has never gone higher than 10% and actually seems to have slowed. In the first nine months of 2014, earnings per share came in 7.2% higher compared to a year ago.
Source: S&P Capital IQ
There is certainly room for ComfortDelGro to grow further and faster. As my colleague Chin Hui Leong shared a few months back:
“I have noted from a CNN report that there are currently more than 160 cities in China that have a population of 1 million or more; for some sense of scale, Singapore’s population stands at around 5.3 million currently. To add to this, more than half the population in China (that works out to be 700 million people) now resides in cities.
These are all potential customers for ComfortDelGro to serve.
Taxi services make up most of the company’s revenue in China. It is present in nine cities, but have taken top three market share positions in Nanning, Jilin, Chengdu, Beijing, and Shenyang.”
But despite having the opportunities, it remains to be seen if the firm can actually make full use of them. As Hui Leong also noted, “in 2013, China made up 5.9% of the company’s total revenue, down from 7.3% in 2012 – ComfortDelgro still has some serious work to do in order to capitalize on the outsized opportunity.”
A Fool’s take
ComfortDelGro has delivered great returns for its investors over the past 12 months. But, the bulk of those gains appear to have come from a rising wave of market enthusiasm regarding the company’s future prospects, and not from the firm’s business-growth (to be clear though, growth is certainly still present – it’s just relatively anaemic).
The company’s current valuation is also higher than at any other point in time over the past decade.
Given these dynamics regarding ComfortDelGro’s valuation and business growth, investors interested in the firm now would have to be very confident in the company’s ability to grow its future earnings at a much faster clip than what it has done since 2009.
There are many things to like about ComfortDelGro’s business fundamentals. But at the moment, a low valuation doesn’t appear to be one of them.
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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.