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FirstGroup shares: a stock on track for recovery

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Shares in bus and rail transport company FirstGroup (LSE: FGP) have climbed by around 25% over the last month, as the route out of the pandemic becomes clearer.

Hopes that the UK’s vaccination programme will lead to an ending of social contact restrictions on June 21st could mean commuters, holidaymakers and shoppers once more taking to the rails and roads in significant numbers.

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The FirstGroup share price has taken a lockdown battering as workers staying at home, shoppers switching to online and the closing of holiday parks has decimated passenger demand.

Its shares dropped from 136.60p at the close on September 22nd 2019 to 38.22p on March 15th 2020, ahead of the first lockdown.

On December 10, it reported a 23.8% plunge in first-half revenues to £3.1 billion, having been hit by travel restrictions.

Its yellow school bus business in the US – First Student – saw revenues fall around 50%, with its iconic US Greyhound coach travel arm also dropping by the same amount.

Passenger revenues at the perhaps less glamorous First Bus in the UK fell 59.5%. However, First Rail – including contracts to run the Great Western Railway and TransPennine Express franchises – was bolstered by summer demand to see revenues climb to £1.7 billion from £1.3 billion.

It is that performance which gives me hope that an end of the lockdown will lead to recovery.

Since the results announcement, FirstGroup’s shares have climbed from 64.75p on December 11 to hit 91.45p on March 10th.

It has largely been boosted by the Government’s road out of lockdown and plunging Covid-19 infection numbers.

People cooped up at home are yearning for the seaside, to hit the shops again and go back to school.

I believe there will be nervousness about going back on to public transport, but for many people bus and train travel remains the cheapest and most environmentally friendly option.

Indeed, FirstGroup should also benefit from the green push towards Net-Zero as it ramps up its fleet of ultra-low emission vehicles.

Don’t be surprised also to see the UK Government introduce financial schemes to encourage a return to public transport. Seat out to help out perhaps?

The Government’s declaration in the recent Budget that it is also looking to power Northern transport infrastructure should be another boon for FirstGroup.

Another positive is the evolution of UK train contracting, as the Government moves from a revenue forecast franchising system to management-contract structures. In theory, this could be a lower risk model for FirstGroup.

Analysts seem to agree on the positive direction of travel. According to the Financial Times, the nine analysts offering 12-month price targets for FirstGroup have a median target of 80p, with a high estimate of 115p.

There are a couple of issues that might stop me buying FirstGroup shares. First is its huge £3 billion debt mountain and its stated intention to sell off its US divisions to help reduce it. Will there be the demand and price post-pandemic?

There is also the risk of another Covid wave and remote working impacting daily transport needs.

But overall, the return to something closer to normality should be positive for FirstGroup. A stronger UK focus should pay-off as the Government looks to ‘level up’ regionally and the public put on their staycation jumpers rather than their Costa del Sol shorts for the foreseeable future.

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David Craik has no position in any of the shares mentioned. 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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