tcl v apa

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Should you buy Transurban Group or APA Group?

By Peter Stephens - August 25, 2014 | More on: APATCL

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2014 has been a great year for investors in Transurban Group (ASX: TCL) and APA Group (ASX: APA), with the two companies seeing their share prices rise by 17% and 28% respectively. Indeed, they have both easily outperformed the ASX, which is up 5% over the same time period.
However, does APA’s strong performance mean that it is now overvalued relative to Transurban? Or could APA continue to outperform its infrastructure peer in the future?
Premium valuations
It’s clear that neither company comes cheap. A quick glance at their respective P/E ratios confirms this, with toll operator Transurban trading on a P/E of 42.3 and APA having a P/E of 31.2. Both are well above the ASX’s P/E of 16.3 and this may lead many investors to believe that shares in both companies are grossly overvalued.
However, there is considerable growth potential on offer. For example, APA is expected to increase its bottom line by a highly impressive 15.6% in each of the next two years. This would be considered more than adequate were it not for Transurban being forecast to grow its earnings by 28.5% per annum over the same period.
Growth at a reasonable price?
Clearly, both of these growth rates are far in excess of those on offer at the majority of ASX-listed companies and, when combined with the two previously mentioned P/E ratios, highlight relatively attractive price to earnings growth (PEG) ratios. Indeed, on this front Transurban is the clear winner, since although its P/E ratio is higher, its better forecast growth rate means that its PEG ratio is currently 1.5 versus 2 for APA.
Income potential
It’s a similar story when it comes to income prospects. Although APA has a slightly higher yield of 4.7% (versus 4.6% for Transurban), the fact that its yield is unfranked means that on a tax adjusted basis Transurban is the more attractive of the two infrastructure peers. Furthermore, due in part to its better growth potential, Transurban’s dividends per share are all set to grow by 11% in each of the next two years, which outstrips APA’s 4.9% per annum forecast over the same time period.
Looking ahead
So, while both companies appear to have bright futures, Transurban seems to offer more potential at current prices. Its valuation, while higher than APA’s, offers more ‘bang for your buck’ in terms of growth potential, while its partially franked dividend equates to a greater after-tax yield. As a result, Transurban could prove to be the better buy.