Rail freight and ports operator Asciano Ltd (ASX: AIO) has not provided shareholders with any joy this year — or indeed ever! Since listing in 2007, Asciano's share price has headed south. In 2012, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained nearly 13%, Asciano's share price is down around 0.5%.
Asciano's underlying businesses have actually performed well this year. It has secured a number of new contracts as well as extending and re-signing existing customer contracts. These include the recently announced $400 million deal with trucking magnate Lindsay Fox's freight forwarding company Linfox, and a new contract signed with Hay Point coal terminal owner BMA for the servicing of BMA's trains used for coal haulage.
While operations are tracking well, with both revenues and profits increasing, building an investment case for Asciano is complicated by the heavily levered balance sheet. A glance back to 2009 will remind investors how close Asciano came to potential collapse under the strain of a heavy debt load. Admittedly, the rail and port operations with their high barriers to entry allow Asciano to maintain large borrowings. However, with a net debt to equity ratio of 81%, not including the $1.3 billion in operating leases, there is little margin for error.
The balance sheet is not the only factor causing Asciano's share price to struggle. It also faces the challenge of an uncertain coal sector outlook, the entry of a third port operator into Brisbane and Sydney (and possibly Melbourne) and an expensive capital expenditure program.
Not all companies within the transport sector have fared badly, of course. For example, logistics provider Qube Logistics (ASX: QUB) has outperformed the market by around 3%, providing shareholders with a total return of 16%, while trucking company K&S Corporation (ASX: KSC) has had an outstanding performance this calendar year with a return of 41%.
Foolish takeaway
Asciano is a good example of why investors should buy companies with strong balance sheets. Even great businesses can come undone when too much debt is in the mix.
If you only invest in one company this year, make it our "Top Stock for 2012-13." Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.
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Motley Fool contributor Tim McArthur doesn't own any of the stocks mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
