The Motley Fool

Are Stagecoach shares set to go off the rails?

Image source: Getty Images.

Releasing its latest annual report today, Scotland-based transport group Stagecoach (LSE: SGC) has seen a somewhat mixed reaction in the early hours of trading, and here is why.

Problems with the trains

The company reported that full-year pre-tax profits have grown 30%, up to £101.2m from £77.6m in 2018, a number that should surely have investors flocking to buy? Well unfortunately, this news was somewhat tempered by the equally large decrease in total revenue for the year, which fell by 33% after two of the company’s rail franchises ended.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

It is this rail franchise aspect that investors are really focusing on and that is no surprise. In April this year, the UK Department for Transport disqualified SGC from three rail franchise competitions because it was unwilling to take on the pension liability, which totalled more than £1bn.

The company has taken legal action against this, arguing that the government breached its statutory duties when it kicked it from the tendering process. But despite this legal battle, CEO Martin Griffiths said in a statement that “we have no intention to bid for new UK rail franchises on the current risk profile” – that is, I suspect, unless it somehow wins its lawsuit.

On the buses

So where does this leave Stagecoach? Well the problem is, nobody really knows – and that’s never a good thing for investors. The company said in its release that it would now be focusing on its core business of bus and coach transport in the UK. This seems to have potential: revenue-per-vehicle-mile in the bus and coach market, a cost-efficiency metric, was up 3.8% for the year, while revenue-per-journey was up 3.4%. The problem is, its rail division has historically been one of its best performers.

Stagecoach maintained its dividend of 7.7p, and reiterated its outlook for 2019/20 earnings. The company has reduced its net debt and successfully sold its North American division, but the truth is that with its rail franchise problems, it is hard to know what the true outlook will be over the next few years. This is exacerbated by the legal battle, with the true costs of time, effort and cash, not yet known.

Taking on ‘the Man’

While the company obviously hopes it will win its legal case, when taking on the government, I would rarely back the challenger – it is, after all, the entity that sets the rules in the first place. All this also comes in an environment in which the rising costs of train travel and perceived declining quality of service mean the public is rarely sympathetic to train operating companies. And in turn the government is pressured to act and to be seen to be getting the best deal for passengers, especially important when a general election could be on the cards.

I don’t think Stagecoach shares are going to plummet just yet – strong words and good dividends can hold investor interest for a while at least – but as we just don’t know how successful the company will be in focusing entirely on buses, I think its fair to say it has a tricky road ahead.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Karl 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.