For some FTSE 250 stocks, the last five years have been transformative. That’s certainly the case for FirstGroup (LSE:FGP) whose shareholders have enjoyed a jaw-dropping 520% return since July 2020. And that’s not even including the extra gains from dividends.
But is this growth story now over? Or can investors still jump on the bandwagon to enjoy market-beating returns? Let’s investigate.
Analysing FirstGroup’s performance
The meteoric rise comes on the back of an impressive turnaround from management. Over the first two years, the business sold off its North America school-bus and transit operation, raising £2.3bn in constant currency terms to tackle its ever-growing debt problem.
Skip ahead to its 2025 fiscal year (ending in March), a combination of a stronger balance sheet and higher passenger volumes has enabled earnings to return to double-digit growth, beating analyst expectations. And with its outstanding debts and equivalents now sitting at just £1.5bn versus the £3.8bn five years ago, management now has far more flexibility in its capital allocation decisions.
With that in mind, it’s not so surprising to see the FTSE 250 stock deliver explosive returns.
Still worth considering in 2025?
Another 500% gain seems unlikely from today’s levels, given it would require the business to expand its market cap from £1.3bn to £7.8bn – enough to put it in the FTSE 100. Over the long term, that might be possible, but I don’t think it’s likely to happen by 2030.
Having said that, there remains a potentially interesting investment opportunity here. Cost efficiencies and digitalisation are steadily pushing their bus operating margins towards 10%. And at the same time, its rail business is also enjoying momentum with a new £500m order for UK-manufactured trains.
This steady improvement in revenue and earnings has paved the way for significant dividend growth, with payouts being hiked every year since they were reintroduced in 2022. And if current trends continue, FirstGroup could evolve into a lucrative income opportunity even with just a 2.9% yield today.
Pairing all this with a forward price-to-earnings ratio of 10.9 certainly suggests that a buying opportunity may still be available for long-term investors.
Taking a step back
As impressive as FirstGroup’s transformation has been, there are still some prominent risks that investors must consider. Operating within the British rail & transportation industry comes with continuous union strikes and pay disputes that disrupt operations.
At the same time, the company operates in a very regulated industry with high dependency on government contracts. Changes in subsidies, contract terms, or fare regulation could put considerable pressure on FirstGroup’s profit margins.
Having said that, all things considered, I remain cautiously optimistic about the future of this business. And while the days of triple-digit growth may be behind us, there’s still a potentially lucrative opportunity here worthy of further investigation.
