Will the share price of toll road operator Transurban Group (ASX: TCL) rise to $20 during 2020?
Since the start of 2019 the Transurban share price has gone up around 34%. If it went up 34% from today's price it would reach almost $21. But how likely is that?
I think there were two things that drove the performance in 2019:
Interest rates
Interest rates are hugely important for determining valuations. If your risk-free return is driven to a very low level you're probably going to put at least some of your money to work in shares. People who prefer holding cash are only going to go for those 'safe' shares like infrastructure businesses such as Transurban and Sydney Airport Holdings Pty Ltd (ASX: SYD).
Long-term Transurban shareholders have been big beneficiaries from the lower interest rates, but economists don't believe that Australia's interest rate will go much lower, if at all. The signing of the trade deal between the US and China will make a RBA rate cut even less likely.
Business growth
Rising share prices can only be supported over the long-term by earnings growth and business progression.
Every year the toll road operator reports a rise in traffic in each city, a rise in proportional toll revenue and growth of proportional earnings before interest, tax, depreciation and amortisation (EBITDA).
Each year Transurban announces that another project has been finished and it's starting another one (or three). WestConnex is one of the main projects that it's working on now.
Transurban is certainly growing underlying earnings each year, but it would have to generate very strong growth for investors to push the share price close to $20 this year from today's valuation which is already high.
It's certainly possible that the share price could reach $17 or maybe even $18 this year if there's another bull run due to the trade war truce, but I don't think a share price of $20 is likely this year.
Foolish takeaway
Indeed, Transurban's performance has been so strong that I'd be hesitant to buy shares today. I'd rather put my money towards shares with higher yields and lower valuations.
