Investment Column: Hold tight on Stagecoach but buy FirstGroup
Stagecoach: Hold. Price: 280.5p (-1.3p) FirstGroup: Speculative Buy. Price: 184.6p (-6.1p)
The battle for the West Coast Main Line has been billed as a struggle between First Group and the Department of Transport (the baddies) and Sir Richard Branson's Virgin (the goodies).
The DoT's handling of the bid process was incompetent and FirstGroup's pitch, it has emerged, was based on questionable logic with wildly optimistic assumptions about future passenger growth in the latter part of it. On the other hand, you have everyone's favourite entrepreneur: the blond-haired dynamo who shakes up moribund industries the world over to the benefit of the consumer. Please.
Virgin Trains is actually half owned by Stagecoach, whose co-founder, Sir Brian Souter, spends his spare time warning that we'll plunge into a pit of Greco-Roman decadence if we accord same-sex couples the same rights as those enjoyed by heterosexual couples (namely to marry). In other words, not exactly a hero.
But the stockmarket loves him, because Stagecoach has done little wrong in recent times.
We're here to asses the investment case for both these transport titans, and when it comes to stockmarket ratings Stagecoach is the winner.
The group sits on a multiple of 10 times forecast earnings for the year ending April 2013, with a moderate, prospective yield of 3 per cent.
There's good reason for such a solid rating. Stagecoach has a good-looking portfolio and its UK bus business, for example, is a star with the highest margins out there. Virgin trains look set to keep the West Coast Main Line for a while, which will make it a bit of money although nothing significant. But there's increasing speculation it may keep it for good, which could give Stagecoach's shares a shot in the arm.
That said, on the sort of rating Stagecoach enjoys it's got to do very well for the shares to progress a great deal from where they stand now. If its megabus concept takes off around the US, the stock could look considerably better than fair value at its current level. But that's asking a lot. It would be wise to have slightly more modest expectations for it.
As an investment proposition, Stagecoach is worth holding. It is a ruthless, well-oiled machine that doesn't make mistakes. But I wouldn't be buying any more just yet and the shares have enjoyed a good run recently. Buy only on weakness.
FirstGroup presents a conundrum. It's very cheap at just six times earnings for the year ending 31 March and could still win rail franchises down the line (pardon the pun). But the bus businesses have had problems and its debt burden makes some investors very nervous.
Charles Stanley's analyst Douglas McNeill points out that you don't worry about a bus company going bust halfway through your journey in the same way as you'd be afraid about being stranded abroad if a travel company went under.
All the same, he notes repayments of that debt pile (estimated at £2bn) have slowed somewhat and the sort of consistency which has Stagecoach's hallmark has been absent.
The yield tells its own story at a prospective 12 per cent. That sort of figure is only found when a company is under a bit of a cloud and is rarely sustainable. The divi will be cut.
The shares had enjoyed a good run as a result of the company's recent trading statement which showed it was managing to reach the half-year stage without any further damage to earnings expectations. However, the West Coast shenanigans sent things into reverse and the shares fell off a cliff.
As one analyst said recently, the company is in "the last-chance saloon", which is the sort of comment which would make anyone nervous and there has been speculation that it might have to resort to a rights issue if sales of less-favoured bus routes or other assets fail to generate sufficient capital.
At least the debt won't need refinancing anytime soon.
Worries abound. But the shares have settled at a low enough level that it might be worth taking a speculative interest. Be warned, though, if you do take the plunge the ride may be a bumpy one. You'll need to arm yourselves with a decent supply of travel sickness pills.
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