The Motley Fool

How to Find Winning Companies – Part 3

Welcome to the third part of the series on using an annual report to find a winning investment.

As a recap: In order to find the best share to invest in, the first thing an investor has to do is gain an understanding of the company. And, one way to gain that understanding is by reading the company’s annual report.

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You can catch up on the previous two articles in the series in here and here.

We’ll continue to use land transport giant ComfortDelGro Corporation Limited (SGX: C52) as an example. You can find the company’s latest (2013) annual report here.

Let’s get things moving.

Gain context

While going through the bus operations of ComfortDelGro, we may have noticed that operating profits for the segment has stalled in some years.

The two charts immediately below (which I’ve shared previously in an earlier article) show the revenue and operating profits of ComfortDelGro’s various business segments:

ComfortDelGro revenue breakdown

comfortdelgro profit breakdown

Source: ComfortDelGro’s Earnings Report

But don’t stop there.

Although the results of the company’s bus operations above do not look satisfying, we should get some context to it as well. For instance, a quick peek into the bus operations of industry peer SMRT Corporation Ltd. (SGX: S53) would reveal the same pattern of underperformance too.

Can SMRT Sustain its Dividends? - 1

Source: SMRT’s Earnings Report

In fact, it appears that SMRT is actually doing worse in its bus segment.

The three charts above also show an interesting trend in both ComfortDelGro and SMRT’s rail/train business segment: The profitability for the segment in both companies have not been up to mark and have actually been nose-diving.

Beyond that, we should also note that ComfortDelgro made $1.2 billion in sales for its taxi operations in the financial year ended 31 December 2013. SMRT, on the other hand, only managed $132 million in revenue for its taxi operations for its financial year ended 31 March 2014.

For the same financial years but on the rail/train side of things, SMRT weighed in with $623 million in sales while ComfortDelGro could only muster revenue of $165 million. Comparisons like these give us a sense of comparable scale between the two companies.

The bottomline is this: Comparing results between different companies may reveal better context than just one report alone.

Be Motley

At the Motley Fool, we believe in having a variety of diverse views. With reference to the bus operations of ComfortDelgro, my colleague Stanley Lim has covered the authorities’ new business model for the public bus industry that will be rolled out begining in late 2016.

Within his article, Stanley highlighted ComfortDelGro’s business risks and opportunities for the future:

“The most obvious benefit for the operators in the new model is that they will save on capital expenditures that were previously required for the maintenance and expansion of their bus fleet.

Singapore will also likely see more new bus operators coming into the industry in the future as the new model for bus operators will be asset-light, hence lowering entry costs. For the two major incumbents in the market – namely SMRT and SBS Transit – it will take a number of years before they face serious competition. This marks a new era for the public transport industry in Singapore.”

This is helpful information to keep in mind.

Beyond that, there is also a Tug-of-Fools series with a bearish case and bullish case for ComfortDelGro. Within the articles, we may find new perspectives that we may have missed if we had analysed the company only on our own.

For instance, the bear case points out the drop in revenue in 2013 in Australia as a point of concern. From the graph below, the revenue from Down Under does seem to have stalled. This could be due to a loss in contracted routes.

ComfortDelGro revenue breakdown

Source: ComfortDelGro’s Earnings Report

Well, that’s all for part 3 for now. Check back tomorrow for Part 4!

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.