For prospective buyers, the company can offer important routes and connection points from Queens, N.Y., through New England and up to Canada. Comparing the company’s route map with that of Genesee & Wyoming Inc (NYSE:GWR) shows a good fit, with PWX providing a coastal transportation system to complement the Connecticut-to-Canada route.
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| Will Genesee & Wyoming make a bid to take over Providence & Worcester Railroad? |
PWX’s revenue was down 7% in 2012 to $29.4 million, with hauling of chemicals and plastics accounting for almost 40% of the total. Despite the drop in revenue, the company was able to turn an operating profit by decreasing its operating expenses by 14%.
The company has a fairly strong balance sheet with no long-term debt and $98 million in property, equipment and land held for development. These assets are booked at cost, not replacement value, and could be a significant prize for a buyer. Best yet, the company paid off all its $4.9 million in long-term debt last year, possibly making itself a more attractive target.
A takeover of PWX by Genesee & Wyoming is far from certain, but PWX would make an attractive target to other rail operators as well. An acquisition would add 516 miles of track in a region with a high density of business. As operators consolidate, efficiencies of scale in administration and marketing can be realized. The shares trade just above book value at 1.2 times, a steep discount to the peer average of 3 times.
PWX still has room for growth if it isn’t acquired. High operating costs, 92% of sales relative to an industry average of 75%, have held back profitability. These are mostly due to salary costs of union contracts and could become more favorable with the next round of negotiations. The massive layoffs resulting from the Canadian Pacific strike have set a precedent in the industry, and the union may be more amenable to negotiate. If the company can lower its operating expenses down to 82% of sales, still well above the industry average, it can add another $2.9 million to the bottom line and boost earnings per share by 82%, to $1.33 per share.
An uncertain future for an industry with strong fundamentals
The bankruptcy of Montreal, Maine & Atlantic Railway after the July crash puts in question service throughout the New England area with opportunities for mergers to create a strong rail network. Larger players like Genesee & Wyoming Inc (NYSE:GWR) could combine assets from Montreal, Maine & Atlantic with those from PWX to create a competitive advantage.
Aside from a buyout or interest from an activist investor, the Providence & Worcester Railroad Company (NASDAQ:PWX) has a strong balance sheet and the potential to add significant shareholder value through cost management.
Risks to Consider: PWX has had a problem with profitability and higher regulatory or insurance costs could hit the bottom line. While the company is a good takeover target, investors may need to wait on the shares for a while.
Action to Take –> Changes in the business costs for short-line railroads, combined with a strong book of a company assets, makes the Providence & Worcester Railroad Company (NASDAQ:PWX) one of the best speculative targets. Even if an offer was made for twice book value, below the industry average, investors could realize a 66% return on the shares.
P.S. — Part of investing is finding opportunities no one is talking about — the needles in the haystack. That’s why we recently put together a special report on 17 little-known “spin-off” companies. Because of the way they were formed, these companies have beat the market 7-to-1 in the past decade and raised dividends as much as 600%, yet most investors don’t understand them at all. To get the names and tickers of some of these stocks, click here.
The article This Takeover Target Could Jump 66% originally appeared on StreetAuthority.com and is written by Joseph Hogue.
Joseph Hogue does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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