Fool's Eye View

[ March 14, 2000 ]

An Unexciting Journey Ahead

By Maynard Paton (TMFMayn)

Carburton Street, London -- Shareholders in National Express (LSE: NEX) have had a tough time of late. Their shares have more than halved, from over 1200p to under 600p in the last twelve months. Not only have long-term shareholders have had to contend with the widespread dumping of boring old transport stocks for fashionable technology ones, the decline has been partly fuelled by the rise in oil prices over that time. National Express, of course, is primarily recognized for operating that famous fleet of white coaches for long distance travelers.

But, the days of just running coaches in and out of Victoria bus station have long gone. The company has embarked on a growth by acquisition strategy in recent years, establishing itself as a train and local public transport operator in the UK, plus making inroads into the US and Australia transport industry. Revenues have grown seven-fold in the four years to 1998. And revenues have increased even further, with the announcement of 1999 results this morning.

And again it was acquisitions that drove the top line sales a further 11% to £1,476m. Underlying sales rose a miniscule 2% to £1,341m, although a little cost cutting saw underlying operating profits rise 7% to £102m. After acquisitions, group operating profits came in at £113m.

There is predictability and visibility at National Express, in terms of the company's future profit stream. Take their eponymous coach operation. It's unlikely you'll find a startup competing against this operation any time soon. The barriers to entry, not least the capital costs involved, are very high. The only public alternative is the trains. And with National Express having a finger in the railway pie as well, National Express becomes a good business "franchise". Indeed, running any public transport operation is usually done on a "franchise" basis. Much of National Express' income is generated from exclusive long-term contracts serving a necessary service. These contracts make for quite a reliable income stream.

The trouble is trying to get more people on board, and the large capital costs needed for expansion. For instance, National Express witnessed a 1% increase in passengers on the buses in the West Midlands. These passengers generated just a 3% increase in revenues. A 5% increase in long-distance coach journeys managed to generate additional revenues of only 2.7%. And then look at the expense needed to generate this sort of top line sales. Capital expenditure amounted to £98m in 1999, with another £260m spent on acquisitions, which in the case of National Express, is definitely needed for future profit growth.

At 575p, the shares languish on a multiple of 9 times the earnings announced today, and on a dividend yield of 3%. In these days of forgotten "old economy" stocks, considering the dividend yield primarily, I suspect there is better value around for slow growing, stable, unexciting and capital intensive businesses.

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