Toll road operator Transurban Group (ASX: TCL) has come to a screeching halt as its shares gave up all of their early gains following its latest traffic and revenue update.
The stock initially raced ahead 1.2% to $9.79 after management posted a 43.4% surge in proportional toll revenue (revenue relative to the group's stake in toll road assets) to $411 million for the three months to end June this year, compared to the same time in 2014.
The spectacular growth is largely due to two recent acquisitions – its 62.5% interest in Transurban Queensland and the Cross City Tunnel.
If the two assets were excluded, proportional toll revenue would be up 17% to $335 million in the June quarter.
That's not bad and rising average daily traffic volumes across its toll roads in Melbourne, Sydney and Brisbane contributed to the solid result, while its Northern Virginia tollways in the US are showing some signs of life although that's coming off a low base.
But the fact that Transurban was unable to hold the gains is raising concern that its stock is fully priced after its 28% rally over the past year compared to a 1% increase in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
I am not surprised by the share price movement – or lack of with the stock trading at yesterday's close of $9.67. The tailwinds that have pushed the stock up are fast fading, in my opinion.
Investors have bought the stock for its generous yield and reliable earnings in this low interest rate and low growth environment, but there are many better priced alternatives on the market right now.
The stock just doesn't look appealing at these levels with its skinny forecast yield of around 4.5% for the current financial year, particularly if you consider its high financial leverage (meaning debt) and poor free cash flow.
Even with the increase in revenue, the group's gearing makes me nervous, especially if I have to pay a 54x price-earnings for a stock that generated an average return on assets of less than 1.5% over the past five years (that's around 75% below the industry average according to data on Reuters).
In many respects, Sydney Airport Holdings Ltd (ASX: SYD) is facing the same challenges although its first-right-of-refusal option to run Sydney's second airport could give it some optionality.
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