Toll Holdings: Buy, hold or sell?

The freight company's shares have underperformed over the past 5 years – has this created a buying opportunity?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »