All aboard, Stagecoach could be the ticket for buyers

Derek Pain: Bullish winds begin to blow
Click to follow
The Independent Online

It's been an uneventful summer for equities. That tired old stock market advice - "sell in May and go away" - has for once served investors well. Whether the rest of the adage - "buy again on St Leger Day" - will prove sound remains to be seen.

It's been an uneventful summer for equities. That tired old stock market advice - "sell in May and go away" - has for once served investors well. Whether the rest of the adage - "buy again on St Leger Day" - will prove sound remains to be seen.

The St Leger is to be run next month and many investors must surely be looking forward to the famous Doncaster race meeting as keenly as the horse racing fraternity itself.

Footsie illustrates the summertime somnolence. It started May at 6,373 points; on Friday it closed at 6,384.5 (please check). But there are indications it could soon be shaken out of its lethargy. For example, there seems little to cause much concern on the economic front although I would not be surprised to see interest rates edge higher.

New York is again looking a bullish influence. It appears, after an indifferent run, to have captured its second wind, and could be heading for new records. In addition, the Barclays strike for Woolwich is the sort of popular corporate manoeuvre that could offer some much-needed inspiration for a sadly lacklustre stock market. It could even prompt a new round of corporate activity.

I do not expect hi-tech shares to shine if there is a revival. Indeed the burn-out may smoulder on for some time. Any rally will, therefore, be on the back of old economy shares, still in many cases offering some splendid dividend yields.

I have decided to mark my return from a three-week break by picking a real oldtimer - the Stagecoach group running old-fashioned transport such as buses and trains.

It has suffered a brutal battering. The shares hit a 54.5p low in the spring. They have since crawled to 80p as the stock market has realised again it had over reacted. But the degree of Stagecoach's fall from grace can be measured by the shares dismal slide from 220p a year ago. And it was only a few years back when they were riding at a peak of 284.5p.

The shares, say stockbroker Redmayne Bentley, are selling at just below eight times expected earnings, and offer a 5.1 per cent dividend yield.

The group has been hit by over-ambitious expansion and is now striving to retrench. Its management, headed by the resourceful Brian Souter, has created a credibility gap which will take time to resolve. But the basic business remains relatively healthy and a sum of the parts valuation suggests the group is worth around 112p a share. The Government's desire for more commuting by bus and train should help the group's trading environment.

When a share has suffered a sharp reverse the possibility of take over action is never far away. Part of the recent strength has been due to the nagging feeling that a bidder may be in the wings.

Mr Souter and his sister, Ann Gloag, are the largest shareholders. They have not participated in share buybacks and could have around 25 per cent of the capital between them. Such a stake would represent a strong platform for launching a management buy-out.

There is also a continuing process of consolidation in the transport industry and it would not be surprising if Stagecoach was picked off by another group. Talk that a financial group could be interested is also in the air. Alistair Gunn, transport analyst at Credit Lyonnais, says: "It could borrow heavily to take out Stagecoach, then break it up to reduce debt."

It is, of course, rarely wise to buy a share solely on takeover hopes. And the Souter/Gloag interest would probably deter a hostile bidder. But the Scottish pair has had a good run and could well be tempted to disembark, leaving others to get the company back on track.

But Stagecoach, despite its difficulties, still generates strong cash flow and remains an attractively profitable company. Even without any outside help the management should be able to produce the sort of performance over the next few years which justifies tucking the shares away in the no pain no gain portfolio.

During my absence, the portfolio has, like the rest of the market, had a subdued time. Still Safeway, on bid and recovery hopes, has continued to make progress and Inter Link Foods, after hitting a 320p peak, is trading at a little below 300p, some 100p up on my buying price, following an impressive yearly report.

Even Weeks, the consultancy, has responded to my threat of expulsion by reaching 5.75p compared with my 4.25p tip. Still the portfolio is in need of revising - a task I will undertake next week.

Looking for credit card or current account deals? Search here