Why this broker slapped a $12.50 price target on Transurban Group shares

Transurban Group (ASX:TCL) has been given a $12.50 price target. Should you buy its shares?

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Toll road giant Transurban Group (ASX: TCL) received a boost today after a research note out of Credit Suisse revealed that its analysts had reaffirmed their outperform rating and $12.50 price target on its shares.

With its shares currently fetching $10.42, this price target equates to a strong potential return of almost 20%.

Interestingly its analysts have maintained this rating despite their belief that Transurban will raise upwards of $1 billion through an equity raising in the second half of FY 2017.

As this equity is likely to be used to fund future growth, the investment bank expects the market to react positively to the news.

Considering its substantial debt and the prospect of a number of rate rises in the United States this year, raising equity rather than increasing its debt burden appears to be the best option for Transurban to fuel its growth in my opinion.

So I would agree with Credit Suisse that there is a good chance that the market will respond positively to such a move.

Should you invest in Transurban?

Whilst I am a huge fan of Transurban and believe it has an incredible portfolio of roads, I can't justify an investment at the current price.

At present its shares are changing hands at approximately 73x estimated FY 2017's earnings according to CommSec. Although I believe it does deserve to trade at a premium to the market average, the current share price is just far too rich for my tastes and runs the risk of dropping lower.

With risk-free bond yields in the United States likely to rise substantially over the next year or two, I don't believe Trabsurban's forecast partially franked 4.8% dividend offers a sufficient risk/reward for investors.

For this reason I would resist an investment and look closely at a company like Vocus Group Ltd (ASX: VOC), which comes at the dirt cheap price of 14x trailing earnings and offers investors a fast-growing fully franked dividend.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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