Investors have long been aware of the potential of infrastructure stocks – a fascination Warren Buffett's love for railways has only helped along.
Generally speaking these businesses experience high fixed costs and capital outlays, but are rewarded with a virtual stranglehold over their respective industry.
Given Australia's comparatively small population and vast land mass, infrastructure companies – railways, ports, airports and so on – also enjoy a relative lack of competition. This is because the costs of developing competing assets outweighs the potential gain in customers.
With these competitive advantages, it's no wonder that most of Australia's infrastructure stocks are starting to look overvalued.
Rail and port investor Asciano Ltd (ASX: AIO) for example pays only a scrawny 2% dividend at its current price. It has risen only 12% (in line with the ASX200) over the past twelve months.
Despite its dividend, Asciano has a few major attractions for the long-term investor:
- Steady outlook for rail volumes thanks to low competition
- Cost cutting and improved cash flows to drive earnings and dividend growth
- EBIT growth of more than 5% predicted for FY2015
- Possible sale of underperforming assets
- Defensive focus from management in light of uncertainty in Australian economy
These attractions are counterbalanced by a few negatives:
- Increasing competition in Sydney, Brisbane and Melbourne port sectors
- Continuing Australian drought
- Uncertainty around coal and iron ore demand and prices
One big question mark for me revolves around the future of iron ore and coal mining, which underpin a good portion of Asciano's business.
On the one hand, the repeal of the carbon tax and Mineral Resources Rent Tax could reduce costs thus maintaining and perhaps tempting miners to increase production.
Numerous new coal mines are planned for various parts of Australia over the coming few years and they will be joined by higher capacity in virtually all of Australia's iron ore mines.
However, coal and iron ore prices are close to record lows; iron ore faces the spectre of reduced demand in China, while coal may or may not become vulnerable to shifting trends in power generation through both Australia and South-East Asia.
Needless to say this situation makes an immediate decision very difficult for investors, although investors with a more long-term focus can ride out the uncertainty.
Over a 5 to 10-year timeframe I expect Asciano to comfortably ride out current global uncertainty, with continued population and commerce growth acting to give the company a solid long-term future.
Investors with the temperament to buy and hold for the long-term will find a lot to like in Asciano.
Buying companies with strong competitive advantages and a long growth runway is a hard to beat strategy for wealth generation.
However, thanks to super-low interest rates causing savers to shift their deposits into the market, investors can have a hard time finding a bargain.
That's why The Motley Fool's latest Top Stock Pick is a small-cap, under-the-radar company – one still trading on a fair valuation despite its impressive growth record.
The latest annual report put another notch in the belt of this solid performer, and management indicated that they expect more of the same in FY2015.
This is a company I already own, and one I think you might like to have a look at too.
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