The Investment Column: Buy a ticket to ride on the Stagecoach

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The Independent Online

Business is booming at Stagecoach's bus division. Over the past few years, the company has been very successful in getting people to abandon their cars and hop on to one of its buses and to support this growth the company said yesterday that it plans to buy 460 new vehicles for £50m.

The group is well ahead of its rivals in using innovative marketing to increase its passenger numbers. In March 2004 it launched megabus.com, a low-cost online bus operator run along the lines of the budget airlines. The idea has proved to be a runaway success - from a standing start, megabus now carriers about 2 million passengers per year, services 40 cities in the UK and offers fares as low as £1 for a ticket from Inverness to London.

Stagecoach also employs the latest market research techniques to try to better understand the kind of service people demand in different parts of the UK. And the innovations do not stop there. Stagecoach, in collaboration with the German engineer Siemens, is working on an optically guided bus which improves boarding for elderly passengers, speeds up journey times and makes best use of limited road space.

In the meantime, December's interims showed that the company's rail division is also performing well. It runs the South West Trains franchise and owns 49 per cent of Virgin Trains, which in turn operates the Cross Country and West Coast lines. Stagecoach is bidding for several new franchises which if successful should boast profitability.

Since hitting an all-time low at the end of 2002, Stagecoach shares have risen ten-fold. But the stock has further to go and investors should hold on for the ride.

Post Office deal is boost for Photo-Me

After last month's profits warning, investors deserved some good news from Photo-Me International. It came yesterday in the form of a contract to supply the Post Office with 400 photo booths. The contract is due to start in the spring and is worth £5m a year in terms of revenues.

However, the deal is also of strategic importance to Photo-Me. It comes at the expense of the privately owned Snap Digital, of which the Post Office was a key customer. Analysts believe it may have little choice but to exit the photo booth industry, which would obviously be beneficial for Photo-Me.

A number of the group's digital media kiosks are also to be installed in post offices. These self-service kiosks have proved a hit with customers keen on printing digital pictures. Although there is plenty of hardware on the market which allows punters to do this at home, Photo-Me's kiosks offer superior results and the company has improved profitability by moving their production to China.

The digital camera revolution has been behind the revival of Photo-Me which has gone from being heavily loss-making to posting a pre-tax profit of £21m in 2004 and £33m in 2005. And the growth in this industry is unlikely to slow any time soon.

However, Photo-Me has frequently disappointed the City. The most recent example of this was last month when it warned that its profits this year would be up to 30 per cent shy of forecasts. This makes the stock only a hold.

More growth ahead for Royalblue

Given the booming stock market, few were surprised to see Royalblue post a strong set of annual results. The company sells software to aid equities traders at banks and brokerages throughout the City and yesterday it reported a 15 per cent jump in pre-tax profits to £11.3m. Revenues were up 24 per cent to £74m thanks to strong demand for its core Fidessa product. Of this total, three-quarters were recurring revenues and this is great news for investors.

By getting paid annual rents for its software - as opposed to a one-off licence fee - the group's earnings are much more visible going forward. This makes the company an altogether less risky investment proposition and allows it to enjoy a premium rating of 30 times forward earnings for its shares.

Royalblue's growth prospects also underpin this valuation. The coming 12 months should see it deliver yet more profit growth as the buoyant market conditions it is currently enjoying are unlikely to ebb. The company is preparing to expand internationally and has recently launched a new derivative product (for which Royalblue has already secured its first customer). Buy.

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