FirstGroup plc Slides: Is National Express Group PLC Or Go-Ahead Group plc A Better Buy?

FirstGroup plc (LON:FGP) has just lost its second rail franchise this year: is National Express Group PLC (LON:NEX) or Go-Ahead Group plc (LON:GOG) a better buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Railway trainFirstGroup (LSE: FGP) surprised investors this morning with news that it has lost the ScotRail franchise, which has operated since 2004, to Dutch firm Abellio.

FirstGroup didn’t specify the financial impact of losing the ScotRail contract, except to say that the loss “does not alter the Group’s stated medium-term targets”.

However, I believe there is likely to be a short-term loss of earnings: according to the firm, ScotRail currently carries 86 million passengers each year, approximately 25% of the 330m passengers carried by FirstGroup’s UK rail operations.

UK rail accounted for 43% of FirstGroup’s sales, and 20% of its operating profits last year, and if the passenger loss is translated directly into lost operating profit, today’s news could shave around £13m from First Group’s operating profits next year.

Better alternatives?

For investors considering buying shares in FirstGroup, I think that a comparison with National Express Group (LSE: NEX) and Go-Ahead Group (LSE: GOG) makes sense (I’ve excluded Stagecoach Group because of its huge debt load).

How do these three firms compare?

% of sales

FirstGroup

National Express

Go-Ahead

UK rail

43%

8%

70%

UK bus/coach

14%

29%

30%

Overseas

43%

63%

0%

As these figures show, there are some surprising differences between the companies. Despite its high-profile UK coach network, National Express makes the majority of its money abroad, in Spain (35% of operating profit) and North America (39% of operating profit).

In contrast, Go-Ahead Group is a UK-only business with a strong emphasis on rail. Go-Ahead also won the Thameslink franchise formerly operated by FirstGroup earlier this year, and has been short-listed to takeover FirstGroup’s TransPennine Express franchise.

What about the financials?

Transport operators traditionally run high levels of debt and have low profit margins, and FirstGroup was forced into a rights issue in 2013, in order to reduce its debt levels.

All three firms now have comparable levels of gearing, so how do they compare on other key metrics?

Ratio

FirstGroup

National Express

Go-Ahead

2014 forecast P/E

12.2

10.7

15.1

2014 prospective yield

1.6%

4.5%

3.6%

Operating margin

3.5%

5.9%

3.8%

Net gearing

108%

88%

84%

On these metrics, National Express looks the most attractive stock, in my view, with a lower valuation, higher yield and higher profit margins.

Go-Ahead should look cheaper in 2015 when Thameslink profits are factored into its earnings, while FirstGroup also looks reasonable for investors seeking overseas exposure — although I would caution that further rail franchise losses could impact medium-term earnings.

Of course, this is only a brief look at these three stocks: before investing, a more detailed analysis of each company’s accounts and prospects would be advisable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 of the best stocks to buy now with £500

I think that Berkshire Hathaway and Activision Blizzard are two of the best shares to buy today. I think they…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I bought 10 cheap shares. Here’s what happened next

After recent price falls, we bought 10 cheap shares for extra passive income in future. This mini-portfolio offers a tasty…

Read more »

Close up view of Electric Car charging and field background
Investing Articles

Is now a good time to buy Chinese EV stocks as economic growth slows?

Chinese EV stocks tend to trade at a considerable discount to their US counterparts. And that's one reason I like…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

I’d happily start investing in today’s stock market – here’s why

The stock market has been moving up even as the economy has been looking shakier. Would our writer start investing…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 22% in a month! This FTSE 100 takeover target could rise further

A takeover bid for an FTSE 100 firm is big news. Here's what I'm doing about RS Group shares after…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Income shares could help me turn £300 into £500. Here’s how

Our writer believes investing in the right income shares over the long term could be lucrative. Here is his approach.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I bought these FTSE 250 shares for fat dividends!

These two FTSE 250 shares have gained in value since I bought them recently. But I still see these stocks…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Should I buy this REIT to add to the others that pay me juicy dividends?

Jabran Khan looks closer at this real estate investment trust (REIT) and decides if he would add the shares to…

Read more »