At 145p, I think this travel stock looks like a bargain! I’d buy today

Although it has been battered by the pandemic in recent months, this travel stock looks ripe for a recovery. Stuart Blair looks at the reasons why.

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In its first-half trading update, National Express (LSE: NEX) warned of a slow recovery. This was accompanied by the firm reporting losses of over £60m. Such losses were the result of a sharp drop in passengers, combined with the need for larger operating costs. As a result, the travel stock fell over 10% that day and is currently down nearly 70% on the year. But I’d argue that National Express shares are primed for a recovery and are a bargain at the current price. This is thanks to the group’s large amount of cash, its position as a market leader, and the necessity of public transport. 

First-half trading update

There is no denying that the first-half trading update is pretty discouraging. In the same period last year, the group made underlying profits of £114.6m. This period saw a loss of £60.7m. Furthermore, net debt was increased by £64m to £1.34bn. This is a large amount of debt for a company not recording a profit.

But such a poor trading update was to be expected. Throughout the pandemic, the group has seen passenger numbers fall by 80% and the need to adhere to social distancing has strained profit margins. Even so, the group recorded records in January and February, thus demonstrating the strength of the travel stock pre-pandemic.  

The future of this travel stock

In the short-term, I cannot see a quick recovery. Although there is now greater demand than in the spring, levels are still significantly reduced. This is due to the need for social distancing on buses, the imposition of local lockdowns around the country and uncertainty on the reopening of US schools (where the firm generates most of its revenues).

Nevertheless, I can still see a bright long-term future for the travel stock. For example, as the departing chief executive Dean Finch has stated, the world needs “greener public transport at its heart” and National Express is in a strong position to achieve this.

With services operating within the UK, the US, Spain, and Morocco, National Express has also established itself as a major business around the world. As a result, it’s well diversified, and this should help it ride out the current crisis.

Strong liquidity position

Finch has also said that the travel stock had “secured exceptional governmental funding” and was “swift to save operating costs”. This included cancelling the 2019 dividend, temporarily suspending all National Express coach services, and placing 40,000 members of staff on furlough. It also raised £235m in an equity placing at the start of May.

Overall, this should provide the firm with a strong liquidity position. In fact, it’s said that it has sufficient cash to survive a second lockdown this year, and a slow 2021. A large amount of cash will also allow it to pick up more business, should competitors fail to survive. As a result, I’ve just bought shares in National Express, and believe that it really is a bargain at its current price.

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.

Stuart Blair owns shares in National Express. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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