There’s a lot to like about FirstGroup (LSE:FGP) shares. Profits are growing, the balance sheet looks good, and the company is buying back shares while reinvesting into the business.
Despite this, I’m holding back. I can see a big red flag with this business, so I’m listening to Warren Buffett and staying on the sidelines.
Positives
Shares in FirstGroup have done well this year. In fact, it’s been one of the best FTSE 250 stocks of 2023.
There are good reasons for shareholders to feel positive about the stock. For one thing, its June trading update announced that profits more than doubled compared to a year ago.
In addition, the company is making moves to electrify its bus fleet. In 2024, it plans to spend £130m on electric buses and infrastructure.
On top of this, there’s a £110m share buyback programme to boost investor returns. Even at today’s prices, that’s still 10% of the market cap, meaning an immediate return for investors.
Even with this investment, the business is set to maintain a strong financial position. According to management, FirstGroup should have more cash than debt on its balance sheet by the end of 2024.
As a final positive, the stock trades at a price-to-earnings (P/E) ratio of around 15. That means it isn’t especially expensive at the moment.
There’s clearly a lot to like about FirstGroup’s shares. But there are also a couple of risks that investors ought to be aware of.
Risks
Two risks stand out to me with FirstGroup. The first is the threat of its assets being nationalised and the second is an issue concerning industrial action.
The company recently had its TransPennine Express rail franchise nationalised due to poor service. And there’s a risk that its Avanti operations could go the same way.
Broadly, the risk of nationalisation is a constant issue for the business to contend with. But I think this is a minor risk compared to issues around labour disputes.
FirstGroup has been dealing with strike action from its bus drivers for a while now. Their dispute is mostly concerning pay and looks set to go on indefinitely.
To my mind, this is a big problem. It threatens to weigh on earnings as passenger volumes are likely to fall and is ultimately likely to cost the company money.
According to Warren Buffett, there are only two reasons why Berkshire Hathaway would sell one of its subsidiaries. These are the prospect of indefinite losses or labour problems.
The company looks like it has a bright future, but unless it can resolve its disputes, everything is less certain. To my mind, this is a much bigger risk than the threat of nationalisation.
A stock to buy?
Ultimately, the issues around industrial action are enough to keep me from buying shares in FirstGroup. The prospect of indefinite strike action makes the stock uninvestable for me.
There’s clearly a lot to like with the business, especially its rail operations. But I’m looking for investment opportunities that carry a bit less risk.
