Looking at two different industries – the technology sector and the transportation sector, one can quickly notice that the Profit & Loss statement of technology firms benefit from the less asset-heavy operating model.
It is a common practice to compare companies belonging to the same industrial sector. However, it would be interesting to see what it is like to compare two different sectors. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change.
Therefore the question is what happens if those industries merge and transportation firms mirror the product proposition of relevant technology firms?
This kind of blurring lines is anything but far from real as those industries reinforce each other as transportation apps become increasingly part of the transportation business model while IT helps them to maximize profits through more efficient capacity planning.
So let’s compare both industries. While gross margins (both ~58%) are on par, the EBITDA margin already differs being nearly twice the percentage in technology (24.39%) as in transportation (13.41%). The gap becomes even more inherent as we look at the net margin being 18% for IT firms and 5.22% for transportation companies.
These facts combined with the already mentioned higher growth rates in technology also impacts the P/E (Price-Earnings) ratio being 30.59 for IT firms and 22.11 for transportation firms respectively.
Therefore, we should also take a look at the debt rate being 1.08 for transportation and 0.3 for technology. Now, the picture changes somewhat as fixed income investors usually seek more stable and reliable returns compared to equity investors often not caring too much about higher volatility.
Transportation firms with technology enabled-business enhancements providing more comprehensive coverage in service terms are therefore set-up well to combine the best of both worlds.
As a consequence, the leverage ratio at those combined firms may decline while the P/E ratio is likely to rise together with the margins.
The opposite effect could apply to technology firms as they now face more competition from traditional asset-based industries which are not willing to forgo higher profit margins by having to pay brokerage or software license fees to those firms without additional strategic benefits.
For this reason, transportation firms with complementary app offers may become an interesting investment target as they provide higher returns compared to pure transportation firms while still being more likely to provide similar stable returns commonly seen in the traditional asset-based transportation sector.
However, despite being convinced that on a macro-level the thesis should hold, we cannot generalize it too much and advise every investor to look at each company separately to validate whether the assumptions hold.
Share your opinions in our comment section: Would you rather invest in pure transport, pure technology or companies being a mixture of both?
Please note that this article expresses the opinions of the author and does not reflect the views of Move Forward.