What: Leading rail freight operator Aurizon Holdings Ltd (ASX: AZJ) has reported a 7.4% rise in underlying profits in what can only be described as a tough market. The result however was below analyst consensus estimates according to Commsec and as a result the market sold the stock down around 3% on Monday.
So what: Earnings before interest and tax (EBIT) for the coal division jumped 25% while EBIT in the iron ore division increased by 6%. These divisions have actually fared reasonably well due to the dependence on volume as opposed to commodity price.
While strong volumes partly explain the solid results, Aurizon's management has also been aggressively cutting costs to right-size the business. This has also been a key factor in improving results.
Now what: Management has commented that it expects a substantial reduction in contracted tonnages for iron ore in FY 2015. Countering this decline they have been looking to new opportunities to drive growth such as via the joint venture proposal with BoaSteel in the Pilbara.
Since listing in 2010, shareholders in Aurizon (formerly Queensland Rail) have enjoyed a share price gain of 72%. Since the start of the calendar year however, the share price has basically flat-lined, thereby slightly underperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which has gained just over 4%.
For FY 2014, underlying earnings per share came in at 24.5 cents per share, representing an increase of 13%. With the stock closing on Monday at $4.88 this equates to a price-to-earnings multiple of 19.9x. At these levels, despite owning some appealing monopoly assets, the stock looks fully priced considering the current headwinds the firm faces and its prospects for growth.
