Investment Column: FirstGroup can travel further

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The Independent Online
HAS FIRSTGROUP, the buses-to-airports group, travelled too far, too fast? Since the beginning of 1998, the shares have nearly doubled in price, from 223p to 431.5p. Earnings per share have gone up by 30 per cent every year for the past three years. Can it sustain this sort of pace?

The City is enthusiastic for two main reasons. First, the group has made a series of rapid acquisitions in the last 12 months. Ditching its old identity as First Bus, the company has bought its way into becoming an integrated transport company. In December, it bought a 51 per cent stake in Bristol International Airport. In March, it spent pounds 105m on the whole of the Great Western Railway franchise, to add to its existing North West Trains operation. FirstGroup has entered a joint venture with Hong Kong's New World Development Company to run 88 bus routes in the former colony. And yesterday it announced the pounds 29.7m purchase of Mainline, a south Yorkshire company which runs 700 buses.

After initial scepticism, shareholders have endorsed the idea of the integrated transport group. That image has also been reinforced by the Government's imminent White Paper on transport which is expected to contain proposals to stimulate public demand and reward the combined use of trains, planes and buses.

The trendy nature of the stock, is, of course, already reflected in the price. Profits last year were up 42 per cent to pounds 72.5m. But a pounds 17m restructuring charge on the newly acquired businesses is forecast to depress earnings to just pounds 95m in the coming year. That puts the shares, which slid 2p to 431.5p yesterday, on a forward earnings multiple of 20, which is not expensive compared to FirstGroup's peers. Hold for the long term.