It’s been barely three months since I last recommended leading bus and rail operator FirstGroup (LSE: FGP), and the shares have already gained 24%. But I have to be honest, I wasn’t expecting the share price to explode so soon after my views were published. As always, my research and analysis is done with a company’s medium-to-long-term prospects in mind.
So why has the share price climbed so high so quickly? And perhaps more importantly, does the FTSE 250 transport group still offer good value for investors?
28% surge
In my view it’s certainly no coincidence that the UK- and North America-focused transport operator broke out from its previous trading range on the day of its third quarter update on 7 February. The share price hasn’t looked back since, climbing 28% from 104p to 133p within a matter of weeks.
The reason? An impressive 12.8% increase in revenue during the quarter, despite tough trading conditions in its UK bus and rail operations. This was due in no small part to currency tailwinds which helped its substantial North American operations to deliver a robust performance.
South Western rail franchise
More recently, the Aberdeen-based group announced a seven-year contract win with the Department for Transport to operate its South Western rail franchise. The new franchise will start on 20 August 2017 and is planned to run for a core period of seven years, with an extension option of up to 11 months at the discretion of the Department for Transport.
FirstGroup made the bid as part of a 70:30 joint venture with Hong Kong’s MTR Corporation, agreeing to invest £1.2bn over the course of the franchise to improve the quality of all aspects of train journeys on the South Western Network. Passengers can look forward to new and better trains, more seats and services, quicker journey times, improved stations and more flexible fare options.
Despite the recent share price surge I still believe FirstGroup trades on an attractive valuation of nine times earnings for the current year, falling to just eight for fiscal 2019.
This loser could be a winner
As always, when a company wins a new contract, a number of rival bidders miss out. This was the case with Stagecoach Group (LSE: SGC). FirstGroup’s gain was Stagecoach’s loss as it was also after the South Western franchise. But does that mean it ceases to be a good investment?
Absolutely not, in my humble opinion. It’s no secret that the Perth-based bus and rail operator has struggled with lower revenues recently, but I believe the long-term outlook for public transport remains promising. Many believe there is a large market opportunity for a shift from cars to public transport against a backdrop of population growth, urbanisation, technological advancements, and increasing pressure to tackle road congestion and improve air quality.
Stagecoach trades on a very low P/E rating of just nine, but at the moment I don’t see this as a an opportunity for growth seekers, with earnings forecast to decline over the medium term. However, with an affordable, generous and progressive dividend payout that currently yields 6%, I believe Stagecoach remains a very attractive income play.
