National Express on the right track

Since pulling out of a nosedive last November, National Express's (NEX) shares have motored over 40 per cent - and by 18 per cent in the past month alone. That there were no nasty surprises in this month's first-half trading update is clearly a positive, and revenue grew 7 per cent. However, we must wait until half-year results are released on 24 July to see how the Spanish operation is navigating the key summer months.

Fare increases and new contracts generated 3 per cent extra revenue there during the period. Intercity operation Alsa fell 3 per cent - better than the 5 per cent decline in the first quarter - but late bonus payments meant like-for-like income at the urban bus business fell 1 per cent compared with a 5 per cent increase earlier this year. Elsewhere, UK coach growth accelerated during the second quarter and, after a bad start to the year, more passengers are using its buses in and around the West Midlands. In North America, last year's acquisition of Petermann drove revenue up 19 per cent and getting on the shortlist for Crossrail means its small rail business could balloon in a couple of years. The sale of US hedge fund Elliott Advisors' remaining stake for £100m is welcome, too.

HSBC says…

Overweight. On the whole, we are reassured by this update. The acid test in Spain will be summer trading, but recent updates leave us confident. We expect a 14 per cent fall in first-half underlying pre-tax profit to £70.7m, giving underlying EPS of 10.8p (21.9p for the full year), and believe the shares are inexpensive relative to the sector, rated on a 9.7 enterprise value to operating profit (ex-rail) multiple, compared with peers on 11-13 times. We also think any rail franchise wins are in the share price for free and like the cash flow profile, so we retain our overweight rating and 250p target price.

Panmure Gordon says…

Hold. Over the medium term we would expect an economic recovery in North America, the UK and Spain to enhance organic growth rates and drive earnings growth. Furthermore, the resumption of the UK refranchising process could allow the company to retain and possibly win additional franchises, although most of the opportunities are several years away. National Express's shares are trading on a prospective earnings multiple of 10.4 times and an attractive dividend yield should support the share price. In the short term, however, there appears to be an absence of catalysts that could trigger a re-rating.