Join our community of smart investors

Stagecoach veers off course

Stagecoach's shares plunged 8 per cent following a cautious outlook for the bus division
December 10, 2014

Rail good, bus bad: that's the simplest way to summarise recent trading at transport operator Stagecoach (SGC). Having just won the InterCity East Coast franchise with Richard Branson's Virgin Group, its joint-venture partner, the rail division is on a high. The same joint venture already runs the West Coast Trains franchise - although in that case Virgin Rail takes the majority of the revenue and cost risk. This visible monopoly has prompted a 'Phase 1' review of the East Coast award by the Competition and Markets Authority. All being well, however, Stagecoach should take control of the line in March 2015.

IC TIP: Hold at 390p

And that's not the only cause for optimism: Stagecoach is also one of three shortlisted bidders to run the TransPennine Express franchise from February 2016 (an announcement is expected next autumn) and is negotiating new contracts for its wholly owned South West Trains and East Midland Trains franchises with the Department for Transport. In the first six months of the financial year, UK Rail revenues grew 7 per cent to £664m.

Stagecoach's bus division tells a different story. Although figures from the last six months look good, management admits that early second-half trading has been weaker than expected. Strong competition in Manchester has weighed on regional UK bus profits, and in North America the bosses blamed unfavourable weather conditions in November. They also claim a falling fuel price will weaken US demand in what is already an over-competitive environment.

Management has therefore lowered its operating profit guidance for both the UK regional bus and North America divisions. They're hoping Stagecoach's share of profits from the venture with Virgin Rail will offset the decline in these segments, and finance director Ross Paterson said the overall earnings outlook was "unchanged" thanks to the strong first half. But that didn't stop the shares tumbling 8 per cent in morning trading.

Analysts at broker Investec Securities expect pre-tax profit of £185m for the current financial year, giving EPS of 26p - up from £181m and 25.8p respectively.

STAGECOACH (SGC)
ORD PRICE:390pMARKET VALUE:£2.2bn
TOUCH:389-390p12-MONTH HIGH:417pLOW: 340p
DIVIDEND YIELD:2.5%PE RATIO:17
NET ASSET VALUE:13p*NET DEBT:£431m

Half-year to 31 OctoberTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131.4798.513.72.9
20141.5598.313.93.2
% change+5-+1+10

Ex-div: 5 Feb

Payment: 4 Mar

*Includes intangible assets of £151m, or 26p a share