The transport sector remains as politically charged as ever. Since the West Coast debacle in 2012 - when Virgin Rail successfully lobbied the government to cancel the franchise it had awarded to FirstGroup (FGP) - the franchising process has been subject to intense public scrutiny. With the Department for Transport forced to pay more attention to service quality, the sector seems to be separating into winners and losers.
One obvious winner last year was Go-Ahead (GOG), which won the high-profile Thameslink contract. Finance director Keith Down told us in September it had "been a really good year" for the bus and rail group - even if it missed out on the Crossrail contract and the Docklands Light Railway. Go-Ahead is currently on the shortlist to run the TransPennine Express franchise from February 2016.
Also on the TransPennine shortlist is Stagecoach (SGC), which continues to run the West Coast franchise alongside Richard Branson's Virgin Group. In December, the same team also snatched the East Coast franchise - the other route from London to Scotland - prompting a review by the Competition and Markets Authority. Meanwhile, Stagecoach alone is negotiating new deals for its wholly-owned South West Trains and East Midland Trains franchises with the Department for Transport. The company looks like another winner.
FirstGroup, on the other hand, has failed to regain its poise after losing the West Coast line. Last year it even came under pressure from Sandell Asset Management, an activist hedge fund run by Thomas Sandell, to offload its struggling US operation. Chief executive Tim O'Toole has said such drastic action is not necessary, and that tight cost control and better contract terms will return FirstGroup to health. The numbers lend his argument some credibility: group revenues are falling as various government subsidies come to an end, but first-half adjusted operating profit rose 2.4 per cent to £104m. Stripping out certain one-off charges and gains on property disposals, pre-tax profit even jumped 70 per cent to £33.3m.
A quieter recovery is under way at National Express (NEX). Last year the group kept its foothold in the British rail sector, retaining its only contract - the c2c Essex Thameside route. But it is more focused on its bus business, which has punchy ambitions for international growth.
| Name | Price (p) | Market value (£m) | PE Ratio | Dividend yield (%) | Share price change 2014 (%) | Last IC view |
| FirstGroup | 109 | 1,314 | 13.3 | 0.0 | -20.0 | Hold, 118p, 5 November 2014 |
| Go-Ahead | 2,480 | 1,066 | 16.7 | 3.4 | 26.3 | Hold, 2,346p, 5 September 2014 |
| National Express | 259 | 1,324 | 12.6 | 3.9 | -10.8 | Buy, 257p, 7 August 2014 |
| Stagecoach | 349 | 2,004 | 13.4 | 2.8 | -7.4 | Hold, 390p, 10 December 2014 |
Favourites
Go-Ahead's reputation for decent service may allow it to win more franchises in the years ahead. On 16 times forward earnings, the shares are more expensively rated than sector peers, but that will prove more than justified if the winnowing of the sector continues. Meanwhile, National Express is a well-run recovery play, with the shares trading on an undemanding 12 times forward earnings and yielding roughly 4 per cent.
Outsiders
It's hard to back FirstGroup. Board infighting has been a problem in the past, and the North American operation is notoriously unpredictable. A comeback isn't out of the question, but rehabilitating the business's reputation with both the Department for Transport and investors will take a lot of work.
