Toll Holdings: Buy, hold or sell?

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.

Foolish takeaway

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.

Looking to transport your investment portfolio higher with high quality, dividend-paying stocks? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Tim McArthur owns shares in Toll Holdings.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.