What should cautious investors do during times of market turbulence? One option is to follow a legendary stock-picker, such as Warren Buffett. Last year he spent $34bn on US railroad Burlington Northern Santa Fe in an all-in wager on the utility like nature of these natural transport monopolies.
What’s more, he is not alone – the sector is on the turn on the back of a deluge of high-speed rail (HSR) projects across the globe. For instance, China is building 30,000 km of new track over the next five years in order to connect all the country’s major cities and is increasing the size of the domestic market by about 500%
This is where Alstom steps in. It is the number-one supplier of HSR infrastructure; it makes France’s iconic TGV trains, and it holds the world rail-speed record of 575km/h. In Britain, the company also maintains the Eurostar and Virgin Pendolino fleets and is active in the booming BRIC economies. But that’s not all. Alstom is also the global leader in gas and steam turbines and has coveted positions in green energy; smart-grid technology; electricity transmission and power-plant maintenance. That makes the firm the quintessential long-cycle investment story, with a whop-ping e42.6bn orderbook as at March (equivalent to two-times turnover) and a solid balance sheet with proforma net cash of e100m.
Alstom SA (Paris: ALO)
I am forecasting 2010 turnover and underlying ebita of e21bn and e1.6bn respectively, rising to e23bn and e1.8bn in 2011. The shares also offer a 3% dividend yield – worth having in these low interest-rate times. I rate the stock on a through-cycle ebita multiple of ten. After deducting the e0.9bn pension deficit, that suggests a price of about e52.5 per share.
So what are the pitfalls? Well, the group would be knocked if there was a prolonged downturn in any of its major infrastructure complexes. Mind you, with such a beefy orderbook, I suspect it can weather even the choppiest of waters. Next, order flow tends to be lumpy and there is an ongoing bribery investigation in Britain that needs to be monitored. Nonetheless, with the euro in freefall (which helps its competitive position), Alston looks a robust play on the long-term demand for HSR, smart-grid technology and electricity.
Recommendation: BUY at e41 (market capitalisation e12bn)
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See
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