The pound has fallen sharply against the US dollar in recent weeks. Many FTSE 250 stocks have been under pressure as investors worry about geopolitics, potential trade tariffs, and domestic growth.
The US dollar has continued to rise as investors bet that the US Federal Reserve will keep interest rates higher for longer. This, coupled with concerns over domestic economic growth in the UK, means we are seeing sterling under pressure.
However, when the pound weakens, UK companies with significant offshore earnings can do well. Trainline (LSE: TRN) is one of the FTSE 250 stocks that I think could be a beneficiary.
What does Trainline do?
Trainline is a leading online platform for train and coach ticketing services across Europe. While it has a strong presence in the UK, Europe represents a key growth market given the sheer number of journeys taken on the mainland.
In its half-year results to 31 August, Tranline reported an 18% increase in first half transactions to over 110m. This helped boost Trainline’s net ticket sales by 14% year on year to £3bn. Adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) grew by 44% to £82m. A growing share of the company’s revenue now comes from international markets, reducing its reliance on the UK economy.
Valuation
The company’s share price has been volatile over the past year, climbing 11.5% to £3.64 per share as I write on 27 January. The majority of those gains came in the final quarter following its results release, which included a second profit upgrade in the space of two months.
The company’s stock trades at a trailing price-to-earnings (P/E) ratio of around 31. That’s well above the FTSE 250 average of 13. I think the key here is how well the company can scale its business model and keep growing its revenues.
Beneficiary of weaker sterling?
Trainline is quite clearly focusing on Europe as a growth market. A significant portion of its revenue is generated in euros, which can translate into higher local currency revenue when sterling weakens.
Another defensive quality is the group’s relatively limited exposure to the US. While investors are concerned about tariffs and other barriers for foreign companies in the US under the new administration, I think Trainline is relatively well insulated from these.
Of course, it’s not all sunshine and rainbows. The company is consumer-facing and relies on the health of the consumer and travel industry. It continues to gain market share in the commuter segment, which is a positive, but there are large risks to growth from both consumer spending reductions and potential new regulations in the UK.
Verdict
Trainline’s international exposure and growth potential in Europe leave it well-placed to benefit from weaker sterling. However, the stock isn’t one that I’ll be buying right now.
The P/E ratio does look quite high enough given the consumer-facing nature of its operations and fierce competition. While weaker sterling is on my mind at the moment, I’m investing with at least a 3- to 5-year horizon. Given where I think we’re at in the economic cycle, I am looking for more defensive exposure in industries like pharmaceuticals when I get some spare funds.
