Toll Holdings' (ASX: TOL) yellow IPEC delivery vans are a common sight across metropolitan Australia but Toll's business is much deeper and more diverse than just those vans. The company employs 45,000 staff across more than 50 countries where it offers many types of freight forwarding, logistics, express and transport services to a wide range of industries and customers.
The diversity of Toll's offering means the company carries a huge fixed cost base. Given many of the economies in which it operates are currently growing at lacklustre levels, it means many of Toll's fixed assets are running below full capacity – which creates inefficiencies and leads to a higher average 'cost to serve'.
These market dynamics mean times have been tough for Toll over the past few years. In financial year 2013 the company only managed to produce a 7.6% return on invested capital (up from 7.4%), while sales revenue and earnings per share (before one-offs) were flat.
In comparison, rail freight, port operator and Toll spin-off Asciano (ASX: AIO) and rail freight operator Aurizon (ASX: AZJ), which are heavily skewed towards coal volumes, both posted higher revenues and higher profits over the past year. Aurizon also posted an increase in return on invested capital (ROIC) from 6.7% to 8%, while Asciano, which reports return on capital employed, saw an improvement from 11.6% to 12.3%.
In 2009, Toll's ROIC was running at levels closer to 9.5%, which highlights the pressures of the currently tough operating environment. The company produced earnings per share (before one-offs) of 41.3 in FY 2013, but according to Commsec earnings are forecast to decline to 39.9 cents per share (cps) in FY 2014 before rebounding to 42 cps in FY 2015.
With the share price currently at $5.70 this implies a price-to-earnings ratio of 14.2 and 13.6 for FY 2014 and FY 2015 respectively. With Commsec stating that the S&P/ASX 300 Index (Index: ^AXKO) (ASX: XKO) is trading on one- and two-year forward PE multiples of 17.6 and 13.4 respectively, it looks like Toll is fully valued given that its growth profile is currently forecast to be lower than the wider market.
The upcoming float of transport firm McAleese Group is likely to refocusing investor attention on the transport and logistics sector. Should the McAleese float be successful and list on a high multiple, this could have positive flow-on effects for Toll.
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Motley Fool contributor Tim McArthur owns shares in Toll Holdings.