1 FTSE 250 stock that could benefit from weaker sterling

Ken Hall takes a look at a FTSE 250 stock that,given its sizeable offshore earnings in mainland Europe, might see a upside to the pound’s recent weakness.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Ken Hall 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »

Investing Articles

Here’s why AstraZeneca stock jumped nearly 6% in the FTSE 100 today

FTSE 100 heavyweight AstraZeneca helped propel the blue-chip index to a record high today. Here's what investors were cheering.

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »