FirstGroup shares are hot in 2023. Should I buy some?

FirstGroup shares are in a strong uptrend at the moment thanks to strong results. Are they worth buying? Edward Sheldon takes a look.

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FirstGroup (LSE: FGP) shares are having a fantastic run in 2023. Year to date, they’re up more than 50%.

Is it worth buying a few shares in the British transport company for my ISA? Let’s discuss.

A major UK transport firm

Let’s start by taking a quick look at the business as this is not a well-known name.

FirstGroup is one of the UK’s largest transport companies, operating both bus and rail services across the country.

Its First Rail division is Britain’s largest rail operator, with brands such as Avanti West Coast, GWR, and South Western Railway in its portfolio.

Meanwhile, its First Bus division is the country’s second-largest bus operator, serving two-thirds of the UK’s 15 largest cities and towns and transporting hundreds of thousands of passengers every day.

A member of the FTSE 250 index, the company currently has a market cap of around £1.1bn, meaning it’s relatively small in size.

Why the share price is rising

I can see why the shares are outperforming in 2023.

Back in June, the company posted full-year results that were much better than expected.

Helped by higher passenger levels on its buses (due to the government scheme to cap fares), operating profit for the year ended 25 March came in at £161m versus £107m a year earlier.

Meanwhile, adjusted earnings per share amounted to 10.6p, about 560% higher than the figure posted a year earlier (1.6p).

On the back of these strong results, the company more than tripled its full-year dividend payout to 3.8p per share.

It also announced an additional share buyback.

These results pushed the share price up significantly at the time, and the stock has continued to rise in recent months.

Should I buy now?

Looking ahead, however, I can’t say I’m that bullish on FirstGroup.

For a start, I’m not sure where growth is going to come from in the long run. Are Britons going to travel a lot more by train and bus going forward? Probably not, in my view. Without top-line growth, the stock may struggle to keep rising. It’s worth noting that City analysts only expect about 0.5% revenue growth this financial year.

Secondly, the company doesn’t have a great track record when it comes to profitability. Over the last six years, return on capital has averaged just 1.2%. That’s very low, and shows that the group is not very effective at generating profits.

There’s also the risk that its assets could be nationalised. Earlier this year, it had its TransPennine Express rail franchise nationalised due to poor service. The same thing could happen to other rail franchises.

Finally, strike action is another major issue to consider. Recently, ASLEF, the train drivers’ union, announced strike action for 16 train companies including Avanti West Coast. These strikes could hit profits.

Better shares to buy?

Of course, FirstGroup shares could keep rising from here. After all, they’re in a strong uptrend right now.

However, given my concerns, I won’t be buying them for my own portfolio.

All things considered, I think there are much better UK shares to buy today.

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 assessed. Consider taking independent financial advice.

Edward Sheldon 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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