Road transport and logistics play a vital part in the growth of the Australian economy. Getting things directly to stores, warehouses and customers is that final link from sea and rail shipping.
If the economy is really going to grow from here, there will be need of even more transport as consumers shop more and businesses move to meet that increased demand. Many companies leave transport up to specialised third-party service providers to keep focus on their core business.
Here is a review of the industry and some of its major participants.
Toll Holdings (ASX: TOL), the road, rail and shipping logistics giant, holds the top place in the $51 billion domestic road freight transport industry. According to IBISWorld industry research, its leading 8.3% share of this market is almost double that of the next closest competitor, Linfox Proprietary, the privately held company founded by Lindsay Fox.
The industry itself is highly fragmented, with only about 15% of the total market controlled by the top four companies. Toll's dominance and size keep it in the lead, but historic profit margins vary between 3%-5%, so in this mature market, it can grow roughly in line with the economy, and is able to increase market share by acquisition of smaller competitors.
With 1.2% of estimated market share, K&S Corporation (ASX: KSC) holds third place, and has just announced earlier this month a merger proposal with number four market share leader Scott Corporation (ASX: SCC). Shareholders can accept $0.59 for their Scott Corporation shares or 0.345 K&S shares, in addition to a $0.05 fully-franked special dividend.
Scott Corporation shares have risen to $0.66. The merger offer is expected to be recommended by the independent board committee, subject to a superior offer. Scott is a $51 million company by market capitalisation, and K&S is about $166 million.
As of yet, there has been no other company has made a rival offer, but industry consolidation like this may cause other companies to attract the attention of investors and competitors alike.
CTI Logistics (ASX: CLX) is a Western Australia-based transport and logistics company with a $145 million market capitalisation. In 2013 it had a net profit of $9.8 million on revenue of $127 million, giving it a net profit margin of about 7.8%, and return on equity was 21.7%, which is highest it's been in six years. Just this month it hit a new all-time high of $2.25, and has a price-earnings ratio of 14.
Foolish takeaway
Investors who are looking for stock ideas can follow this industry easier than a high-tech pharmaceutical or mining company. Many people can understand how the business works, and comparison of different companies is more straightforward.
You still need to know how they make their money and understand their business segments to accurately assess their future growth and earnings.
