Lessons from History: Why ComfortDelGro Corporation Limited’s Shares May Be Risky Now

Land transport giant ComfortDelGro Corporation Limited (SGX: C52) has been a sizzling performer of late.

Since the start of the 2014, the company, which is part of the 30 blue chip shares that make up the Straits Times Index (SGX: ^STI), has seen its share price jump an impressive 54% to S$3.09 as of yesterday’s close.

This sharp run-up has undoubtedly been a wonderful experience for shareholders. But, it has also created risks in the company’s shares for would-be and new investors.

Valuation risks

At a price of S$3.09, ComfortDelGro’s shares are valued at a trailing price-to-earnings (PE) ratio of 23.6. And as you can see in the chart below (click for larger image), that’s the highest valuation the transport outfit has had in the past 10-plus years since the start of 2005.

ComfortDelGro's historical PE ratios from Jan 2005 to Feb 2015

Source: S&P Capital IQ

Buying shares at a historically high valuation need not necessarily mean that investors are taking on undue amount of risks.

But, the experience of other blue chips like Keppel Corporation Limited (SGX: BN4), Wilmar International Limited (SGX: F34), City Developments Limited (SGX: C09), and CapitaLand Limited (SGX: C07) can attest to the need for caution when the shares of a company carry inflated valuations.

History’s long lens

The chart below (click for larger image) plots out various valuation measures for the aforementioned group of four (PE ratios for Keppel Corp and Wilmar; price-to-book ratios for City Developments and CapitaLand) from the start of 2005 till the end of 2008.

Historical price-to-earnings (PE) and price-to-book (PB) ratios for Keppel Corp, Wilmar, City Development, and CapitaLand from start of 2005 to end of 2008

Source: S&P Capital IQ

Prior to the onset of the Great Financial Crisis, the Straits Times Index had peaked at 3,900 points on 10 October 2007.

From the chart just above, the valuation measures for the quartet on that date were also near their respective highs since the start of 2005 (the PE ratios for Keppel Corp and Wilmar were 26 and 48 respectively; meanwhile, the PB ratios for City Developments and CapitaLand were 3.0 and 2.6 respectively).

Here’s how the quartet’s shares and business have performed since then:

Historical financials for Keppel Corp, Wilmar, City Developments, and CapitaLand

Source: S&P Capital IQ

I trust it’s obvious to see that the results aren’t pretty despite the quartet having shown business growth. Turns out, their high valuations back in 2007 have played a huge role in their disappointing share price returns.

A Fool’s take

ComfortDelGro’s shares may yet go on to be a wonderful winner years into the future. But at such elevated valuations, investors would have to be confident about the future performance of the company’s business.

And as it is, any growth-momentum in ComfortDelGro’s earnings seems to have slowed down these past few years as you can see in the table below:

ComfortDelGro's earnings growth

Source: S&P Capital IQ

ComfortDelGro will be releasing its fiscal fourth-quarter earnings this evening. Would-be or new investors in the company might want to watch out for signs of the company’s ability to ramp up its earnings growth in the future.

There are many things to like about ComfortDelGro’s business fundamentals now. But, even the best businesses can become disastrous investments if bought at too high a price – that’s the verdict history has given us.

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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.