Company Review: Providence and Worcester Railroad Company (PWX)

1Company Profile:  Providence and Worcester Railroad Company (PWX) (obtained via Google Finance)

Providence and Worcester Railroad Company (P&W) is a class II regional freight railroad that operates in Massachusetts, Rhode Island, Connecticut and New York. The Company transports a variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and demolition debris, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. P&W serves as an interstate freight carrier in the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. It also operates double-stack intermodal terminal facilities in New England in Worcester, Massachusetts.

Business and Management Review
1) Is the business simple and understandable?

Providence and Worcester is a very small regional railroad with a total market cap of $86.1 million.  The railroad focuses mainly on intermodal (semi-trailers stacked on train cars) freight transportation in the New England region and currently operates on about 545 miles of track.

2) Does the business have a consistent operating history?

The company began operating as an independent railroad in 1973 and has remained focused on its initial operating strategy as a freight rail service.  In addition, the company has been consistent in its acquisitions by targeting connecting lines to grow.  Financially, the company has paid a dividend and maintained a positive net income for over 10 years.

3) Does the business have favorable long term prospects?

As the only interstate freight carrier in the state of Rhode Island (according to their website), Providence and Worcester holds a strong competitive advantage in their operating region.  To enter the railroad industry requires substantial capital to construct lines, build customers, purchase equipment, etc.   

4) Is management rational?

Management has remained rational throughout its history, as evidence in the acquisition strategy the management has employed.  The company has not made any irrational purchases that were not within the initial operating strategy. 

5) Is management candid with its shareholders?

Providence and Worcester has a very limited website and there is limited information available for the company.  However, the site lists the company directory with the email addresses and phone numbers for several key individuals.

6) Does management resist the institutional imperative?

We have found no reason to doubt that management has fallen under the spell of the institutional imperative.

Financial and Value Review
Defensive:
1) Size of firm

With a market cap of only $86.1 million, this company is far too small for the defensive investor.

2) Strong financial condition

The company’s current ratio of 2.15 is proof of a solid financial condition.  Pass.

3) Earnings stability

The company has had a positive net income for over 10 years.  Pass.

4) Dividend record

Providence and Worcester has paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have not grown more than 1/3 over the last 10 years.  The company fails this test.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 97.27, the requirement of under 20 is not met.  Also, the company’s trailing 12-month PE ratio is 55.

7) Price to assets analysis

Though the PB ratio is only 1.24, allowing it to pass half of this requirement, the multiple of its PE and PB ratios is over 50.

Overall

Having passed only 4 of the required 8 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Providence and Worcester is suitable for the defensive investor.

Enterprising:
1) Strong financial condition

The strong current ratio allows the company to pass this requirement.

2) Earnings stability

The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.

Overall

We find the company to be suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be around $18. 

Opinion:

Since the company is currently trading at about $19, we feel it is fairly valued but may be a suitable investment for the enterprising investor.

Neither of us held a position in Providence and Worcester Railroad Company at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the fourth part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbriar Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry


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