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Buses & Railways: A Safe Investment Right Now?

Do Stagecoach (LSE: SGC), Go-Ahead (LSE: GOG), FirstGroup (LSE: FGP) and National Express (LSE: NEX) offer meaningful upside these days?

Stagecoach Reports

Stagecoach stock is bucking the trend of a declining market on Wednesday in the wake of decent full-year results — which, however, were nowhere as good as Go-Ahead’s. “We have met our expectations for the year,” Chief Executive Martin Griffiths said. That’s not good enough.

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Revenue and earnings came in broadly in line with expectations and they were only slightly higher than in the previous year. A 10% dividend hike doesn’t really change the investment proposition. Based on trading multiples, operating profitability and growth prospects, Stagecoach stock looks expensive. Let’s move on.


Go-Ahead surprised the market last week, when it reported preliminary results for the year and raised its guidance. Driven by the performance of its rail operations, the bus and rail operator will continue to deliver growth, better profitability and solid earnings. Its stock is up 7% since preliminary results were announced.

Executives know how to manage expectations. The equity valuation of the company has been rallying since December, when Go-Ahead said it expected its full-year results to beat expectations. Will next time be any different? I doubt it will.

Furthermore, long-term upside resides in Govia, a joint-venture between Go-Ahead and France’s Keolis that will operate the new Thameslink Southern and Great Northern franchise. Operations will start by the end of the year. The loss of the franchise was terrible news for FirstGroup, in particular, as well as for other Go-Ahead’s rivals.

Go-Ahead has a solid balance sheet, which is unusual for bus and rail operators in the UK. Its one-year performance on the stock market reads +63%, while its dividend yield is in line with the market’s. There is reason to believe that Go-Ahead could also become a takeover target. The allure of a take-private deal is obvious, although an M&A premium is not priced into its stock.

FirstGroup & National Express

FirstGroup is in restructuring mode. Its debt pile has come down since last year, but management must do more to reassure investors. FirstGroup is a transport operator in the UK and North America; deeper focus on its geographical reach would help it improve efficiency, which means divestments shouldn’t be ruled out.

A similar logic applies to National Express, which heavily relies on debt, just like FirstGroup, to finance its operations. FirstGroup and National Express are probably the less appealing investment propositions in the space, although their financials have improved in the last 12 months.

National Express rejected an approach from FirstGroup in 2009. In a way, they belong to each other, and if they managed to sort out their ailing capital structures first, a combination between the two would make lots of sense.

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Alessandro doesn't own shares in any of the companies mentioned.