I’m seeing good value among some companies in the travel and leisure sector at the moment. Only some, mind you. For example, I’ve got my bargepole out for Thomas Cook, but I’m keen on Carnival, the world’s biggest cruise ship operator.
Today, I’m going to give my views on the valuation and prospects of National Express (LSE: NEX), which released its half-year results today, and over-50s specialist firm Saga (LSE: SAGA). While the latter is officially in the insurance sector, travel is actually its largest segment by revenue.
Express delivery
Moving people from A to B can be quite a lucrative business, if executed well. National Express has been doing it in the UK for years, but increasingly has also tapped into targeted high-growth markets abroad.
The company today reported another set of record results. It said the performance was “primarily driven by organic revenue, profit and margin growth in every division,” and added, “we are currently trading ahead of expectations.”
Group revenue increased 10.5% (7.8% at constant currency), with earnings per share rising 12.7%. The board lifted the interim dividend 10%, continuing the company’s record of strong payout growth.
In early trading, the shares jumped as much as 6% to a new multi-year high of 450p, but have come off a little and are changing hands at 438p, as I’m writing. At this price, City analysts’ full-year forecasts put the stock on a price-to-earnings (P/E) ratio of 12.6, with a prospective dividend yield of 3.7%.
I think this represents good value for a company whose prospects for continuing growth appear excellent. I’d happily buy the stock today.
Quite a saga
I looked at Saga exactly a month ago when its shares were trading a whisker above 33p — a far cry from its 2014 stock market flotation price of 185p. I thought 33p was good value, and wrote: “Because the stock is so cheap, I also see potential for a bid from private equity or for activist investors to come in and push for a break-up of the group. I think this may limit further downside for the shares.”
Well blow me down, not only did 33p prove to be a floor, but also an activist investor arrived on the shareholder register last week. Elliott Capital Advisors, which previously agitated for Whitbread to break up Premier Inn and Costa Coffee, disclosed a 5.1% stake in Saga. Bloomberg reported Elliott wants Saga “to explore options to boost returns for shareholders, including potentially separating its insurance and cruise businesses.”
The share price had started to head north before Elliot came on the scene, but it’s risen higher since. The question now is whether, after soaring 50% to 49.5p in the space of just a month, the stock currently offers good value for investors.
The margin of safety to allow for any earnings disappointment isn’t as high as it was a month ago, but a forward P/E of 6.6 remains attractive, in my opinion. Also, with it targeting a 50% payout ratio for the dividend, a prospective yield of 7.6% could bear quite a substantial downgrade and still be generous.
All of this without even considering potential value-enhancing break-up options. Personally, I continue to rate the stock a ‘buy’.
