Time to ride the Stagecoach

Management says current trading is "good" and profits for 2011-12 should hit City targets after like-for-like revenue at the UK bus operation accelerated during the second quarter, driving growth of 2.2 per cent in the 24 weeks to 16 October. Stagecoach, still run by founder Sir Brian Souter, made 37 per cent of revenues and almost 70 per cent of profits from its UK bus business last year. Bus sector profits have grown in each of the past five years and now high petrol prices are persuading more people to swap their cars for the bus.

Concerns about a Competition Commission inquiry into profits made by local bus operators look overdone, too. "Pretty benign" is how one City analyst describes it. A final report will be published early next year, but price controls and the forced sale of local bus services have been ruled out.

True, the road ahead isn't entirely smooth. Next April sees a 20 per cent cut in the Bus Service Operators' Grant, which makes up 9 per cent of income for English bus operators outside London. Still, a flexible cost base means Stagecoach can protect its sector-leading profit margins. Further sharp fare increases are inevitable next year and unprofitable routes will be axed.

In North America, the US budget coach business, Megabus, is driving double-digit growth. Revenue jumped 12 per cent in the five months to 30 September, slightly down on the first quarter, as it was held back by a new hub in Atlanta. But Stagecoach thinks sales can grow from $75m to over $110m in the year to April 2012.

A miserable economy generally means lower UK rail profits. This time, however, all of Stagecoach's rail businesses will, from this month, enjoy government revenue support. That pretty well takes the risks out of its rail operations, especially as its East Midland franchise doesn't come up for renewal until 2015 and South Western two years later. And rail reform will hold few surprises, too. There is talk that a white paper first planned for later this month will be delayed. Besides, longer franchises have already been accepted and will mean greater certainty for operators.

Meanwhile, upcoming rail re-tendering could throw up opportunities. There was little surprise when Stagecoach failed to win the Greater Anglia rail franchise. Its energy will, instead, be diverted to the Intercity West Coast rail franchise, where it owns a 49 per cent stake and currently runs the service with Virgin. The government's decision to delay the start of the new franchise period to December 2012 has been warmly received. The prize – a contract that will run until at least 2026 – is widely expected to go to the incumbent Virgin Rail team. Most of the other long-distance franchises coming up for grabs – East Coast, Great Western and Capital Connect among them – will also attract its attention and Stagecoach could do well.

And let's not forget the company's track record when it comes to returning cash to its shareholders. This summer's £340m handback, worth 47p a share, marks Stagecoach out as "an efficient manager of investments", according to broker Peel Hunt. We agree.