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Why I’d Buy BAE Systems plc & Stagecoach Group Plc Over Centrica PLC & Monitise Plc

Here’s why I don’t think Centrica (LSE: CNA) and Monitise (LSE: MONI) are investable right now. By contrast, BAE Systems (LSE: BA) and Stagecoach (LSE: SGC) may offer upside to the end of the year and beyond. In short, my queries I’ll try and answer are: 

a) Centrica slashed its payout last week, and we knew that was coming. The key question now is: was that enough? 

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b) Monitise is still under pressure after it reported first-half results, with its stock down almost 20% year to date. But what lies ahead? 

c) Stagecoach is still trading around its one-year low: why is that? It looks cheap.

d) Finally, BAE Systems trades at a five-year high. Is a rally still on the cards? It’s not too expensive…

Not For Me

Centrica and Monitise: what do they have in common? Nothing at all operationally, of course, but these two companies are among my least favourite picks in the UK universe. 

At 12x forward earnings, Centrica stock is still overvalued by about 25%, in spite of its latest drop. The British Gas owner is cutting investment and slashing costs, yet political risk must not be underestimated,  and if asset disposals are not properly executed then Centrica could be in trouble financially.

Buybacks won’t provide a fillip for a long time. Not only could its payout ratio be cut further, according to my calculations, but its debt position may become less sustainable into the second half of the year. Net leverage below 2x is now expected to rise by 40% in 2015 as profitability plummets.

Its risk profile is much higher than that of other utilities, and capital losses are likely to persist to the end of the year. Severn Trent, to name one possible alternative investment, is much more appealing. The same applies to National Grid. 

Talking of high risk, how can we avoid talking about Monitise? This is one company that doesn’t strike me as having any particular competitive advantage in the marketplace, so its ability to generate additional cash flows in months ahead will be vital. I truly believe that a takeover is the only way out for shareholders, but I am not sure why any potential bidder should offer more than 20p a share. 

A Calculated Risk

If I were to embrace risk in the equity market, I would not invest in Centrica and Monitise — I’d rather choose Stagecoach. 

Stagecoach is not the best play in the rail and buses industry — arguably, Go-Ahead is — but Go-Ahead isn’t cheap enough, after a very solid performance (+83%) in the last two years. Meanwhile, other players such as FirstGroup and National Express do not top my wish list.

Stagecoach has been under pressure since a profit warning for the first half of the fiscal year in December, but trading multiples and fundamentals suggest the shares could bounce back in 2015, and if you are after an opportunistic trade, you should keep an eye on it, with the view of adding the shares to your diversified portfolio as soon as possible. Its relative valuation points to value, and this may also turn out to be the best play on consolidation in the UK rail and buses industry. 

You Got To Love BAE Systems

What’s not to like at BAE? 

“We continue to win significant new business with over GBP10bn of new orders from the UK and US for the third successive year. As a result, the large order backlog of GBP40.5bn continues to provide good, multi-year visibility across many of our businesses,” BAE said when it reported 2014 results last week.

The stock is up 13% year to date and has gained 20% of value in the last six months. It is not expensive at 16x forward earnings, though, and I’d rather invest in BAE than in Rolls-Royce

Favourable currency trends and solid financials suggest BAE could outperform the market into 2016, while a projected dividend yield in the region of 4% could attract yield-starved investors who will likely be willing to pay up for stable earnings growth in the next 24 months — that’s precisely what BAE’s pipeline offers. A price target in the region of 600p-650p to the end of 2015 is reasonable. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Centrica and Stagecoach. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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