Fool's Eye View

[ December 5, 2000 ]

Company Comment: Stagecoach

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- The share price of Stagecoach (LSE: SGC) has been in steady decline for almost two and a half years. Every time investors think it can't drop any further it pulls another trading disappointment or management reshuffle out of the hat and tumbles still further. But this morning's interim figures contained some faint glimmers of hope that better times could be approaching. But the problem is that they are still glimmers at this stage.

Buses...

Sales, excluding the effect of recent disposals, were ahead by almost 30% to £1.09b. However, underlying profits dropped by 30% to £92m. Coach USA, whose underperformance sparked a profits warning earlier this year, is still facing pricing pressure due to fuel and labour costs. Its operating margins have fallen from 20% to 14%. It is now the largest contributor to overall profit following the disposal of the Porterbrook train leasing business to Abbey National (LSE: ANL) in April.

The UK bus business has also seen a decline in profitability, for similar reasons. Together these businesses account for two-thirds of Stagecoach's profits. They both have market-leading positions and reasonable long-term growth prospects. The group's other bus operations in Hong Kong, Australia, New Zealand and Portugal make up another 14% of profits. Whilst these businesses are never going to be a significant driver of group performance their market positions and recent track records are impressive. They could teach the UK and US operations a thing or two.

Trains...

South West Trains and Stagecoach's stake in Virgin Rail accounts for the most of the remaining profits. Stagecoach said it was too early to assess the financial impact of the Hatfield tragedy and recent flooding although it did say that it expected that payments from Railtrack (LSE: RTK) would substantially offset any fall in profits. Prior to these events both train operating companies were demonstrating good growth in passenger numbers.

Stagecoach's other investments include Prestwick Airport and Road King, a toll road operator in China.

And Buybacks?

Stagecoach has spent £221m on a share buyback programme over the last few months. It may extend this beyond the total of £250m that was planned originally. The share buybacks are the main reason behind the increase in net debt to £841m. Whilst this level of debt is reasonably comfortable investors will probably start to get twitchy if it goes much higher than £1b. The underlying business is still generating reasonable levels of cash flow.

Light At The End of the Tunnel?

If Stagecoach can repeat its performance in the first half then we have a business generating profits after tax of around £130m to £140m. That implies a forward price to earnings ratio in the region of 6, given Stagecoach's current market value of £850m. While that is not expensive Stagecoach still needs to convince its doubters by reversing the decline in margins in its core UK and US bus divisions and that the new management team has settled in. Until then it looks likely to remain stuck in the tunnel.

Where Next?

• Stagecoach discussion board
• Rising Rolling Stock