Shares in travel and tourism companies fared particularly poorly as markets tumbled. That is understandable. Measures intended to control the Covid-19 pandemic have stopped people moving around for work and leisure. Nevertheless, the sector is a good place to hunt for stock market crash bargains.
National Express (LSE: NEX) is in the business of moving people around. By mid-March, its share price was down 81% for the year at 90.4p. Then the company issued a Covid-19 update and prices bounced back. Shares are changing hands for around 220p today.
That update was undoubtedly reassuring for investors. But before we get to that, let’s remind ourselves of National Express’s recent history.
Navigating a market crash
The financial crisis of 2007–08 and the recession that followed left National Express in a precarious position in 2009. Falling customer numbers exposed a weak balance sheet and poor businesses. The annual report for 2009 was littered with references to “normalised” numbers, an attempt to distract attention from the loss that was made.
A new CEO took charge of National Express in early 2010. Underperforming businesses were shed, debt was slashed, the dividend was cut, and profitability restored. As a testament to the depth of the restructuring, 2009 revenues were only surpassed again in 2019.
Now National Express faces another crisis. This time the CEO has prior experience of leading the company through a crisis and out the other side and has been at the helm for 10 years. However, experience counts for nothing unless it is acted on.
Before 2009, National Express had operating margins in the low 6% range. It covered its interest expenses a little over twice with operating earnings and funded its assets with nearly four times as much debt as equity. The UK market was responsible for 63% of the company’s revenues, with smaller North American and European operations providing 16% and 20% respectively.
In 2019, before this crisis hit, operating margins were in the upper 8% range. Interest expenses were covered three and a half times over by operating earnings, and total liabilities were a little under three-times total equity. The geographic revenue mix is also different now; the UK accounts for 22% of revenues, North America 45%, and Europe and North Africa make up 30%.
Cheap return journey
Before this crisis, National Express was in good shape. Nevertheless, the disruption to its services this time around is at least as bad as it was in 2009. This disruption, potential or increasingly real, drove the stock price down. National Express’s Covid-19 update reassured investors in three ways.
First, there was a reminder that the company was in good financial shape and taking steps to cut costs. Second, a good chunk of the company’s contracts are being honoured partially or in full, and government support for employee costs is forthcoming. Third, in the first two months of the year, group revenue was up by 17%.
The last point is important. National Express runs transit and school busses, intercity and international coach services, does charters and private hire, and puts on rail services. Revenue and profits had been growing steadily before the coronavirus hit, as had the stock price. Dividend yields averaged 3.7% over the last five years.
I think National Express is a stock market crash bargain. We might not be out of the woods yet, but the company is in a good position to come through this crisis and prosper.
