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Small-Cap Stocks

Hitting Home Runs by Playing Small Ball

By Elliott H. Gue, on Jul. 3, 2014

Perennial favorite Student Transportation (TSX: STB, NSDQ: STB) has delivered a total return of about 21 percent since we added the stock to the Lifelong Income Portfolio in July 2013. Price appreciation and accumulated dividends each accounted for roughly half this total return.

Although the Canadian dollar has rebounded over the past month, weakness in this currency has weighed on the firm’s total return in US dollar terms by about 1.4 percentage points.

But elevated commodity prices and Canada’s solid fiscal position should support the country’s currency in coming years, providing additional support for Student Transportation’s stock price and the value of its monthly dividend.

However, the niche company stands to benefit the most by executing its time-tested business plan, which involves building scale in the bus transportation services it provides to school systems in the US and Canada.

In May 2014, Student Transportation secured a 5.5-year contract with San Bernadino County Superintendent of Schools in California.

With this annual US$10 million contract, Student Transportation has extended its service agreements with all the school systems served by Atlantic Express, a firm that the Canada-based company acquired last year.

More important, Student Transportation has leveraged its platform in California to expand its deal with the Los Angeles Unified School District.

These new contracts and others signed in its fiscal year ended June 30, 2014, have locked in revenue growth of 10 percent for the next 12 months.

However, this uptick in sales won’t flow to the bottom line immediately; Student Transportation upgrades all newly acquired systems with new buses and other equipment when the contract starts. As a result, the company incurs most of these capital expenditures up front, with efficiencies and improved cash flows coming later.

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