Is Stagecoach Group plc A Better Buy Than Go-Ahead Group plc, easyJet plc and International Consolidated Airlns Grp SA?

Stagecoach Group plc (LON:SGC), Go-Ahead Group plc (LON:GOG), easyJet plc (LON:EZJ) and International Consolidated Airlns Grp SA (LON:IAG) all benefit from lower fuel costs.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Today, Stagecoach (LSE: SGC) reported adjusted earnings per share rose 2.7% to 26.7 pence. This had slightly exceeded analysts’ expectations of 25.9 pence, but was broadly in line with management’s expectations. Shares in Stagecoach remain mostly unchanged at 406.5 pence during morning trading.

Revenues grew by 9.4% to £3.2 billion, as its rail operations reported like-for-like revenue growth of 8.7% and this year’s results included the company’s new East Coast rail franchise. However, operating margins fell across the group, except for its London bus operations, which benefited from a one-off £3.0 million release of insurance provisions.

UK rail margins fell from 2.7% last year to 1.8%, but this excludes its Virgin Rail Group joint venture in the West Coast rail franchise. The West Coast rail franchise operating margins rose to 5.5%, from 0.6% last year, as it benefited from the shift to a new commercial franchise, where previously it ran under a management contract.

Lower oil prices reduce demand for bus travel, particularly long distance coach services, as it reduces car operating costs. This reduces the cost competitive advantage of bus and coach services. Because US fuel duties are lower than in Europe, this shift in competitive advantage is felt more strongly in the US, hitting Stagecoach’s US megabus coach services particularly hard.

Although megabus is a promising coach brand, lower oil prices would make its expansion more costly in the medium term, as profitability is likely to remain weak for some time. Together with intensifying competition in its northern UK bus routes, Stagecoach is likely to deliver weak earnings growth in the medium term.

Go-Ahead Group

UK bus margins may be higher for Stagecoach than for Go-Ahead Group (LSE: GOG), but recent changes in margins have been moving in the opposite direction. Go-Ahead’s margins outside London have improved 1 percentage point in the first half of 2015, to 12.9%, as the company was able to deliver higher fares and more contract income. Competitive pressure differ across the UK, and Go-Ahead seems to be operating in softer markets.

The end of major roadworks in Oxford and the late economic recovery in the North East means that bus passenger revenues should improve towards the end of 2015 and in 2015. This should mean that Go-Ahead is likely to deliver faster earnings growth than Stagecoach in the medium term. Go-Ahead also has a more attractive dividend yield, 3.1%, which compares to 2.6% for Stagecoach.

Airlines are better buys

Lower fuel prices reduces demand for bus and rail travel, but it increases demand for air travel. Although bus, rail and airline companies all benefit from lower fuel costs, airlines are substantially better off in a low oil price environment.

However, airlines tend to hedge their fuel costs, which means the recent fall in the oil price has a limited benefit to airlines’ earnings in the short term. easyJet (LSE: EZJ) has hedged some 78% of its fuel needs until the end of September 2015, and 52% for the following year.

This means that lower oil prices take time to feed into the earnings of airlines. Legacy carriers, including International Airlines Group (LSE: IAG), have more to benefit from lower oil prices, because fuel costs represent a larger proportion of costs for their long-haul routes.

easyJet and IAG are attractively valued, with forward P/Es of 12.4 and 10.3, respectively. Recent weakness in IAG’s shares following the Aer Lingus bid makes IAG a particularly compelling stock on lower oil prices.

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.

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

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »