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Why Transurban Group shares should be considered a blue chip buy

What: With a market capitalisation of $20 billion and a monopoly-type, defensive business model, the ASX-listed global toll road operator Transurban Group (ASX: TCL) should arguably be considered a blue chip stock.

So What: Perhaps some in the investment community have already acknowledged this status given the share price has been pushed up 18% over the course of calendar year 2015 and thereby significantly outperformed the minus 6% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

There are other more immediate drivers for the share price though…

Recently, the group announced that it had entered into exclusive negotiations with the Victorian government on the Western Distributor Project. This is a key infrastructure project for the state of Victoria and is expected to cost around $5.5 billion.

Transurban also recently announced that it will participate in a competitive process with its partner Skanska under a “design, build, finance, operate and maintain concession model” of the I-66 in Virginia, USA.

Now What: Given the corporate structure of Transurban’s businesses and the long-term assets which the company owns, Transurban has in the past reported what could be described as “depressed earnings”.

Those reported earnings are set to soar over the next few years according to Thomson Consensus Estimates with earnings per share (EPS) jumping from 12 cents in financial year (FY) 2015, to 32 cents in FY 2016, to 35 cents in FY 2017, and to 58 cents in FY 2018.

That’s certainly a hefty (EPS) growth rate and implies a FY 2018 price-to-earnings ratio of 17.4x based on the current share price of $10.11. Arguably, that’s roughly around about fair value for the stock, so any share price weakness could be viewed as a buying opportunity for long-term investors.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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