(This article originally was published in the 9/2/12 edition of The Market Capitalist Newsletter.)
It is common knowledge that the U.S. Federal government and many state governments have been in a fiscal bind since around 2008. This fiscal conundrum is expected to continue for at least a few more years, if not longer. As an investor, this is troubling because it is a partial reflection of an economy that had a significant contraction and has subsequently failed to generate much growth. Yet, the contraction in private tax revenues and its impact on public services does not mean that investment opportunities do not exist.
As a general rule, when a landscape changes, whether it is culturally in a specific industry or within a government, investment opportunities are likely to arise. This occurs because there is often a disconnect in terms of what was and what is. As a shift from X to Y occurs, many people do not fully realize that the shift is occurring or fail to recognize that the shift is real. Since being a successful investor has a lot to do with anticipating change, a shift in the way things are done or perceived creates opportunity.
The way in which governments function at a local, state and federal level in the U.S. are historically going through a period that is filled with a significant amount of change. The primary driver of this change is the economic reality of the Great Recession that became very apparent in late 2008 and 2009. As a result, the way and manner in which certain governmental entities are funded has and is changing.
On a local level, public schools are one, if not the most, publicly recognizable services provided through tax payer funds. These entities have their own geographic territory, board of directors, physical structures, budget, transportation service and the list goes on.
Like most government entities, the majority of public schools have felt some form of fiscal contraction of the past 4 years. When faced with this reality, decisions must be made. A great example of these necessary decisions occurred in the state of California this past winter. California faced a shortfall in projected revenues, which led to a predefined trigger mechanism to be engaged by the state. Part of this ‘trigger’ was a cut to school transportation funding by half of the state’s original budget for the year.
Ultimately, the outcry from schools, parents and other constituents was enough for legislation to be passed that amended how the funding cut would be applied. A cut occurred, but it did not hit the specific funding for school transportation.
This story illustrates a few noteworthy points for investors. First, public school funding faces a number of challenges in an environment where funding is lacking, yet some peripheral services are valued more than others. Transportation is a service in high demand by those sending their kids to public schools.
Second, even though a service, such as transportation, might be in high demand, it does not mean that it is static and won’t change in some form. In the case of transportation, operating a fleet of buses is expensive. Fixed costs are high and operating costs can vary greatly. Though transportation from school to home will most likely not fade away, the way in which operations are conducted may shift when faced with great fiscal austerity.
Student Transportation, Inc. (STB) is the 3rd largest school bus transportation company in the U.S. The company is 15 years old and operates in 16 states and Canada, transporting over 600,000 students a day.
STB is a company that should be on your investment radar if you are an investor looking for an income producing investment that also has the potential to grow. Based on the stock’s current price, the annual dividend yield is around 8.60%.
The current fiscal environment most school district face will create an opening of opportunity for STB and other similar companies. Though my analysis of STB is not at a point where I would recommend buying the stock, it is a company in a position where it could capitalize on a significant amount of growth in a service area that will see a stable amount of demand in the future.