Gamble of the week: Windfall for haulage firm

An Eddie Stobart truck is one of the most recognisable sights on Britain’s roads. The trucks have a huge fan club and there’s even a TV series about them. But do the shares of parent company Stobart Group warrant the same level of affection?

Moving goods from place to place is what makes economies work. Known in the trade as logistics, it is also a hard way to make a living. Competition at the bottom-end, box-shifting part of the market is cut-throat. To survive, firms such as Stobart have to become a major part of a firm’s supply chain and make sure that goods are delivered on time in the most efficient way possible.

Stobart is quite good at doing this and has a decent reputation. But that doesn’t change the hard facts of this business. Essentially, it’s all about keeping your fleets of trucks and warehouses as full and as busy as possible. This has been quite a challenge in recent months, as some of Stobart’s customers had expected to be a lot busier than they have turned out to be.

This is not a huge surprise, given the weak British economy, but for a company like Stobart, with all the costs of renting trucks, warehouses and fuel, a small reduction in sales can lead to quite a big drop in profits. So it will keep cutting costs and becoming more efficient to keep profit levels respectable.

Given that the trucking business dominates the group, the tough business conditions here have probably put a lot of investors off buying the shares.

Stobart Group (LSE: STOB)

Stobart share price chart

But there’s a lot more to Stobart than trucks. In fact, it has some quite interesting assets that aren’t making lots of money yet, but have the potential to do so in a few years’ time.

The most interesting of all is Southend Airport, which is now officially London’s sixth airport. More than £100m has been invested here in assets, such as a new terminal building, a good railway link to London Liverpool Street, and a Holiday Inn hotel. Budget airline easyJet has signed up to fly from the airport for ten years, while Aer Lingus also flies to Ireland from here.

EasyJet is adding new routes, and there are already plans to expand the terminal building and extend the runway. This means there is potential for passenger numbers and profits to grow rapidly. If Southend can attract more passengers from nearby Stansted, then Stobart could be sitting on a very valuable asset.

The other area of potential is Stobart’s biomass business. It sources biomass products, such as waste wood from the construction industry and woodchips from British sawmills, then sells them to power generators and industrial plants, which burn them to generate electricity. It also sources waste products that would have gone into landfill sites and makes fuel products out of them.

With the government looking to support biomass, this could turn into a profitable business for Stobart. This business is growing nicely and is also exporting products to Europe. It is also a good source of growing demand for the company’s trucking business.

The shares trade on just over 11 times 2013 expected profits. That’s probably too much for a trucking business that’s heavily geared to the British economy. But throw in the potential profits from the airport and biomass businesses, and the shares start to look quite interesting.

On top of that, the 6p dividend looks safe enough for now and gives the shares a 6.3% yield at the current price of 95p. So you’re being paid to wait and see if the growth projects can pay off. Given all this, the shares look worth a gamble at the very least.

Merryn

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