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Will the National Express share price recover in 2021?

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The National Express (LSE:NEX) share price took quite a tumble in early 2020. Travel restrictions led to most of its transport fleet remaining parked for a prolonged period of time. But as the vaccine rollout continues, restrictions are beginning to ease. So the company is back on the road.

The stock has already begun recovering. Over the last 12 months, it’s up by nearly 45%. So, is now the time to add it to my portfolio?

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The rising National Express share price

Before the pandemic hit, the National Express share price had increased each year for seven years in a row. This was primarily thanks to its ability to secure new contracts, resulting in a continually growing revenue stream.

In fact, in 2019, the company reported new record levels in both sales and profits, which reached £2.74bn and £187m respectively. By comparison, these figures were around £1.75bn and £123m five years prior. Its growth has been consistent and impressive, as has its rising dividend yield.

The pandemic swiftly put an end to this upward trajectory. And by the end of 2020, revenue fell by 28.7%, while underlying profits dipped into the red with a reported operating loss of £381.4m. Obviously, this isn’t good news. So why is the share price going up?

Even though the full-year performance was poor, most of this impact occurred in the first half of 2020. The rest of the year actually saw a return to growth rates similar to historical levels. How? Because the company successfully signed a collection of new contracts with a gross value of £900m. Simultaneously, free cash flow became positive again, reducing the firm’s reliance on debt financing, so much so that the management team was able to pay off £400m worth of loans.

Overall it looks like the pandemic hasn’t caused any severe permanent damage to the business, and so the National Express share price is back on the rise.

The road ahead

While the latest quarterly figures show several signs of recovery, there are still plenty of challenges that lie ahead. The company still has not returned to full operating capacity. And I think it may be some time before it does, due to the social distancing requirements transport operators have to comply with.

To demonstrate the extent of this problem, the Financial Times reported that over 76 passenger vehicle companies in the UK have gone bankrupt because of the disruptions the sector continues to face today. Needless to say, should travel restrictions be extended due to rising infection rates, it could have a negative impact on the National Express share price.

The National Express share price has its risks

The bottom line

Overall, it seems to me that this business has managed to navigate the uncertain Covid-19 environment relatively well. Its balance sheet looks pretty healthy, in my opinion. And seeing positive free cash flow is quite encouraging.

Assuming that passenger volumes don’t start falling again, I think the National Express share price can make a full recovery by the end of 2021. And with it, the return of its historical 4% dividend yield. Therefore I would consider adding this stock to my portfolio.

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Zaven Boyrazian does not own shares in National Express. 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.

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