Then the transport company released first-half results on Wednesday and the FirstGroup share price slumped 14% in morning trading.

Optimism had been high after June’s FY results gave the share price a boost. So what went wrong? And do we now have a buying opportunity?

First half

Results for the half came in ahead of expectations, boosted by acquisitions. Adjusted operating profit reached £103.6m, up from £100.8m in the same period last year. Adjusted earnings per share (EPS) rose 16%. And the interim dividend is up 29%.

But losing the South Western Railway contract took the shine off an otherwise solid half. The company said: “For FY 2026, we anticipate First Rail’s adjusted revenue and adjusted operating profit will be marginally lower than FY 2025.”

Overall, guidance suggests modest adjusted EPS growth for the full year, and “to then at least maintain adjusted EPS in FY 2027“. That doesn’t sound too bad. But I can understand why shareholders hoping the company’s ongoing turnaround would lead to further growth in the next couple of years.

Cracking five years

The refocus really has been impressive. Selling off US operations helped tackle debt. And 2024’s loss per share turned into an expectations-beating profit in 2025 after higher passenger volumes.

I’m really not surprised by the FirstGroup share price soaring 230% over the past five years. Well, up until this latest setback.

But even after the dip, we’re still looking at a five-year gain of 170%. And the shares are still ahead of the FTSE 250 year to date, though well down from August’s 52-week peak of 240.4p.

What next?

I do think growth investors might have got a bit ahead of reality earlier in the year. After all, FirstGroup is in the business of moving people from place to place. And the supply of people wanting to be moved is extremely limited. So we really can’t expect much in the way of long-term passenger volume growth.

Efficiencies, cost control, and improving margins are helping. And I do see room for further growth there. But again, the scope has to be limited — by competition for one thing, though regional franchises help offset that.

What I see is a new-look FirstGroup that’s probably close to a new level of stability. But I don’t see a lot the company can do to push earnings too much further.

What to do?

That level currently puts the shares on price-to-earnings (P/E) multiples of around 10 for the next few years — which I don’t think is overpriced. Dividend yields look around the 4% mark.

Being in a government-regulated industry does bring risk. But it can also mean a degree of stability. Against that background, I reckon FirstGroup is definitely worth considering as a steady income stock. In the short term however, disappointed growth investors could put more pressure on the share price.

The post Why did this FTSE 250 growth star just plunge 14%, and is it cheap now? appeared first on The Motley Fool UK.

But is this growth story now over? Or can investors still jump on the bandwagon to enjoy market-beating returns? Let’s investigate.

Analysing FirstGroup’s performance

The meteoric rise comes on the back of an impressive turnaround from management. Over the first two years, the business sold off its North America school-bus and transit operation, raising £2.3bn in constant currency terms to tackle its ever-growing debt problem.

Skip ahead to its 2025 fiscal year (ending in March), a combination of a stronger balance sheet and higher passenger volumes has enabled earnings to return to double-digit growth, beating analyst expectations. And with its outstanding debts and equivalents now sitting at just £1.5bn versus the £3.8bn five years ago, management now has far more flexibility in its capital allocation decisions.

With that in mind, it’s not so surprising to see the FTSE 250 stock deliver explosive returns.

Still worth considering in 2025?

Another 500% gain seems unlikely from today’s levels, given it would require the business to expand its market cap from £1.3bn to £7.8bn – enough to put it in the FTSE 100. Over the long term, that might be possible, but I don’t think it’s likely to happen by 2030.

Having said that, there remains a potentially interesting investment opportunity here. Cost efficiencies and digitalisation are steadily pushing their bus operating margins towards 10%. And at the same time, its rail business is also enjoying momentum with a new £500m order for UK-manufactured trains.

This steady improvement in revenue and earnings has paved the way for significant dividend growth, with payouts being hiked every year since they were reintroduced in 2022. And if current trends continue, FirstGroup could evolve into a lucrative income opportunity even with just a 2.9% yield today.

Pairing all this with a forward price-to-earnings ratio of 10.9 certainly suggests that a buying opportunity may still be available for long-term investors.

Taking a step back

As impressive as FirstGroup’s transformation has been, there are still some prominent risks that investors must consider. Operating within the British rail & transportation industry comes with continuous union strikes and pay disputes that disrupt operations.

At the same time, the company operates in a very regulated industry with high dependency on government contracts. Changes in subsidies, contract terms, or fare regulation could put considerable pressure on FirstGroup’s profit margins.

Having said that, all things considered, I remain cautiously optimistic about the future of this business. And while the days of triple-digit growth may be behind us, there’s still a potentially lucrative opportunity here worthy of further investigation.

The post This FTSE 250 stock is up 500%! Is it too late to buy? appeared first on The Motley Fool UK.

The push to go green

Let’s start with one company that I’d include in my initial portfolio. FirstGroup (LSE:FGP) is a leading private sector provider of public transport. It runs bus and train connections, including brands such as Avanti West Coast and GWR.

Over the past year, the stock has soared by 79%. Even though the sector might seem stagnant, the business is pushing for growth and higher profits. This can partly be achieved with the pivot to going green. Late last year it announced a 50/50 venture with Hitachi to help make and buy up to 1,000 electric bus batteries.

Although this is a multi-year strategy push, it is ultimately expected to add several million to bottom line profits by 2026. I think buying now for the years ahead could be a smart play, as the share price should track the profits in heading higher.

As a risk, the ongoing public sector strikes do present a problem. The disruption and ultimately lost revenue that can result from these strikes is painful for the business. As we currently stand, more strikes are due for April.

Not for me

A company that I’d stay away from is the Watches of Switzerland Group (LSE:WOSG). The stock is down 57% over the past year. I don’t want to get caught up in thinking this is a gem to snap up.

The stock has dropped due to poor results over the past year. This was further compounded in January, when the business cut the forecasted revenue for the full year. Instead of the previous estimation of £1.65bn-£1.70bn, it said it now expected to be between £1.53bn and £1.55bn. This is quite a steep cut.

The Q3 results that came out last month commented that the firm was experiencing “slower demand for luxury discretionary purchases”. When I consider the mood on the ground here in the UK, the fact that we’re in a recession is certainly going to weigh heavy on people thinking about buying a luxury watch.

I struggle to see the business outperforming anytime soon, given the economic outlook and the fact that the firm is rapidly falling out of love with investors.

Of course, I could be wrong here. With a price-to-earnings ratio of 6.45, it certainly flags up as being undervalued on that metric. For long-term value investors, this could be appealing.

The post With my first £1k, I’d buy this growth stock but steer clear of this disaster appeared first on The Motley Fool UK.

So, could the positive momentum be set to continue? Or ought I to avoid the shares for now?

Know what you invest in

When buying shares, price is only one part of the equation (although it is an important one).

The other one is the what.

What exactly am I buying into? Is it the sort of business I think has attractive long-term commercial prospects?

FirstGroup operates in a space I believe has attractive economic prospects. It operates a fifth of the country’s buses outside London and is the biggest rail operator in the country.

Demand for buses and trains is often (though not always, as we saw in the pandemic) resilient and fairly predictable. Often it is close to or actually is a monopoly – and may even be subsidised by government.

That said, my investment in rival Stagecoach turned out to be a poor one. It had a similar bus business to FirstGroup.

I see risks here too, from the possibility of regulatory intervention hurting profit margins to falling long-term demand for buses leading to lower revenues.

Performance has been improving

Still, as the soaring FirstGroup share price suggests, the company is in much better shape than it was several years back.

Revenues in the first half of its current financial year were basically flat compared to the prior year period. But adjusted profit before tax more than doubled to £71m.

The interim dividend grew by two-thirds.

On a statutory basis, though, the accounts for the period recorded a pre-tax loss of £68m.

While net debt fell it was still £1.1bn. Stripping out lease liabilities, the net debt was around £384m. I see that as manageable.

Is this a bargain?

There are some positive signs in those results.

But I do not think that I would currently describe FirstGroup as a brilliant business. After a tumultuous few years, it still look like it is in recovery mode.

That alone puts me off investing.

But even if I liked the company enough, the valuation does not look attractive to me. The current FirstGroup share price is 16 times last year’s earnings per share.

That looks pricey to me for a business that has demonstrated uneven performance, operates in a mature industry and has razor-thin profit margins. Last year’s net profit margin was under 2%.

I have my doubts that the share price can keep rising the way it has in recent years unless the business can massively grow its profits.

For now, in any case, it does not offer the right combination of business quality and attractive valuation to make me want to invest.

The post Up 60% in a year, can the FirstGroup share price keep going? appeared first on The Motley Fool UK.

However, the share price is down 5.4% today (23 November) to 165p after the British transport operator released its first-half earnings report.

Is it worth picking up a few shares in my ISA for 2024 and beyond? Let’s take a look.

A big rebound

The first thing to note is that the stock has performed incredibly strongly over the past three-and-a-bit years. Indeed, since hitting an all-time low of 32p in July 2020, it’s up a jaw-dropping 415%.

The stock has clearly been one of the major beneficiaries of the normalisation of travel following the pandemic. Perhaps this isn’t surprising. After all, the company’s First Bus business is the second largest regional bus operator in the UK, carrying more than a million passengers a day.

Meanwhile, its First Rail division is Britain’s largest rail operator, with brands like Avanti West Coast, GWR, and SWR.

Strong H1 results

In the 27 weeks to 30 September, year-on-year revenue was basically flat at £2.2bn. However, group adjusted operating profit increased to £100.6m from £66.1m. Adjusted earnings per share (EPS) reached 8.1p, a significant increase from 4.6p.

An interim dividend of 1.5p a share was declared, up from 0.9p. Plus, around £67m has been returned to shareholders via its share buyback programme, with about £75m remaining.

Yet the company booked a statutory pre-tax loss of £68.4m due to charges incurred from the termination of its participation in two First Bus local government pension schemes. It says this action will result in annualised cost savings of about £2m-£3m.

Looking ahead, the group’s full-year outlook remains in line with expectations. It expects positive free cash generation after capital expenditure and shareholder returns, resulting in an adjusted net cash position of £40m-£50m.

This is despite the “ongoing challenging economic and industrial relations environment“. The latter refers to long-running disputes over pay and conditions.

Recently, the train drivers’ union ASLEF announced further rail strikes in the run-up to Christmas. So this could still be a risk to profits moving forward.

Electrification of bus fleet

The company has committed to running a zero-emission bus feet by 2035 and helping the government remove all diesel-only trains from service by 2040. 

On this, it’s forming a £100m joint venture with Hitachi for the leasing of up to 1,000 electric bus batteries.

It’s on track to have almost 15% of its bus fleet at zero emissions while operating four fully electric depots in England by March 2024.

Should I invest now?

While the company is improving its profitability and making admirable progress towards decarbonising its operations, I do worry about top-line growth. It hasn’t risen meaningfully in many years and now seems stuck around the £4bn annual mark.

This is understandable, given that buses and trains are hardly a growth market.

But I also think that a new government could nationalise — or make other changes to — huge swathes of public transport. In October, Labour committed again to radically overhauling the rail system if it wins the next general election.  

Given this issue, as well as the ongoing strikes and low revenue growth, I’d rather invest in other UK shares right now.

The post Should I buy FTSE 250 stock FirstGroup in 2024? appeared first on The Motley Fool UK.

Is it worth buying a few shares in the British transport company for my ISA? Let’s discuss.

A major UK transport firm

Let’s start by taking a quick look at the business as this is not a well-known name.

FirstGroup is one of the UK’s largest transport companies, operating both bus and rail services across the country.

Its First Rail division is Britain’s largest rail operator, with brands such as Avanti West Coast, GWR, and South Western Railway in its portfolio.

Meanwhile, its First Bus division is the country’s second-largest bus operator, serving two-thirds of the UK’s 15 largest cities and towns and transporting hundreds of thousands of passengers every day.

A member of the FTSE 250 index, the company currently has a market cap of around £1.1bn, meaning it’s relatively small in size.

Why the share price is rising

I can see why the shares are outperforming in 2023.

Back in June, the company posted full-year results that were much better than expected.

Helped by higher passenger levels on its buses (due to the government scheme to cap fares), operating profit for the year ended 25 March came in at £161m versus £107m a year earlier.

Meanwhile, adjusted earnings per share amounted to 10.6p, about 560% higher than the figure posted a year earlier (1.6p).

On the back of these strong results, the company more than tripled its full-year dividend payout to 3.8p per share.

It also announced an additional share buyback.

These results pushed the share price up significantly at the time, and the stock has continued to rise in recent months.

Should I buy now?

Looking ahead, however, I can’t say I’m that bullish on FirstGroup.

For a start, I’m not sure where growth is going to come from in the long run. Are Britons going to travel a lot more by train and bus going forward? Probably not, in my view. Without top-line growth, the stock may struggle to keep rising. It’s worth noting that City analysts only expect about 0.5% revenue growth this financial year.

Secondly, the company doesn’t have a great track record when it comes to profitability. Over the last six years, return on capital has averaged just 1.2%. That’s very low, and shows that the group is not very effective at generating profits.

There’s also the risk that its assets could be nationalised. Earlier this year, it had its TransPennine Express rail franchise nationalised due to poor service. The same thing could happen to other rail franchises.

Finally, strike action is another major issue to consider. Recently, ASLEF, the train drivers’ union, announced strike action for 16 train companies including Avanti West Coast. These strikes could hit profits.

Better shares to buy?

Of course, FirstGroup shares could keep rising from here. After all, they’re in a strong uptrend right now.

However, given my concerns, I won’t be buying them for my own portfolio.

All things considered, I think there are much better UK shares to buy today.

The post FirstGroup shares are hot in 2023. Should I buy some? appeared first on The Motley Fool UK.

At 142p per share the dividend yield for this financial year (to March 2024) sits at 2.8%. This is underneath the 3.5% average for FTSE 250 shares.

However, a rapidly improving yield beyond this year suggests FirstGroup shares could be a top pick for investors seeking dividend growth. For financial 2025 and 2026, yields clock in at 3.4% and 3.8%, respectively.

But how realistic are current dividend forecasts? And should I buy the travel titan for my shares portfolio?

Healthy forecasts

The shares aren’t famous for their dividends. Until recently, in fact, the company hadn’t paid any sort of dividend for more than half a decade. This reflected management’s efforts to reduce debt, and then to conserve cash during the pandemic.

However, the sale of almost all its US operations for $4bn in 2021 gave the firm the cash injection to start paying dividends again. It dished out full-year payouts of 1.1p and 3.8p per share in financial 2022 and 2023 respectively.

The rail and bus operator has also used its robust balance sheet to buy back shares. It completed a £75m repurchase programme in recent weeks, and is in the process of buying back another £115m worth of stock.

Perhaps unsurprisingly, City analysts expect annual dividends to grow again this year to 4p per share. And additional meaty hikes, to 4.8p and 5.4p, are forecast for the following two years.

FirstGroup looks in great shape to meet these forecasts and not just because of its solid balance sheet. Predicted dividends are covered between 2.6 times and 2.9 times for each of the next three years. Any reading above 2 times provides a wide margin of error.

Should I buy?

It’s clear that the turnaround here has been mighty impressive. Adjusted profit more than doubled last year, while it ended the 12 months to March with cash on the balance sheet.

But as a potential investor this is of little concern to me. What I’m thinking about is whether FirstGroup can keep this impressive momentum going. And there are two big hazards I think could blow the recovery off course.

One of these the very real threat that more of its rail operations could be nationalised. Its TransPennine Express franchise was taken under government control in May. Its Avanti West Coast is in danger of going the same way when its current six-month contract extension expires in October too.

Then there is the ever-present danger of industrial action. Drivers at its First Bus unit in Manchester are currently taking part in strikes that are set to last into September, in fact. And some of its train drivers will also strike next month in a long-running dispute over pay.

On the plus side, huge investment in areas like electric buses and infrastructure could reap big rewards. But I still believe the risks of owning FirstGroup shares outweigh the potential rewards. I’d rather buy other dividend shares today.

The post Here’s the FirstGroup dividend forecast for the next THREE years! appeared first on The Motley Fool UK.

Despite this, I’m holding back. I can see a big red flag with this business, so I’m listening to Warren Buffett and staying on the sidelines.

Positives 

Shares in FirstGroup have done well this year. In fact, it’s been one of the best FTSE 250 stocks of 2023. 

There are good reasons for shareholders to feel positive about the stock. For one thing, its June trading update announced that profits more than doubled compared to a year ago.

In addition, the company is making moves to electrify its bus fleet. In 2024, it plans to spend £130m on electric buses and infrastructure.

On top of this, there’s a £110m share buyback programme to boost investor returns. Even at today’s prices, that’s still 10% of the market cap, meaning an immediate return for investors.

Even with this investment, the business is set to maintain a strong financial position. According to management, FirstGroup should have more cash than debt on its balance sheet by the end of 2024.

As a final positive, the stock trades at a price-to-earnings (P/E) ratio of around 15. That means it isn’t especially expensive at the moment.

There’s clearly a lot to like about FirstGroup’s shares. But there are also a couple of risks that investors ought to be aware of.

Risks

Two risks stand out to me with FirstGroup. The first is the threat of its assets being nationalised and the second is an issue concerning industrial action.

The company recently had its TransPennine Express rail franchise nationalised due to poor service. And there’s a risk that its Avanti operations could go the same way. 

Broadly, the risk of nationalisation is a constant issue for the business to contend with. But I think this is a minor risk compared to issues around labour disputes.

FirstGroup has been dealing with strike action from its bus drivers for a while now. Their dispute is mostly concerning pay and looks set to go on indefinitely.

To my mind, this is a big problem. It threatens to weigh on earnings as passenger volumes are likely to fall and is ultimately likely to cost the company money.

According to Warren Buffett, there are only two reasons why Berkshire Hathaway would sell one of its subsidiaries. These are the prospect of indefinite losses or labour problems.

The company looks like it has a bright future, but unless it can resolve its disputes, everything is less certain. To my mind, this is a much bigger risk than the threat of nationalisation.

A stock to buy?

Ultimately, the issues around industrial action are enough to keep me from buying shares in FirstGroup. The prospect of indefinite strike action makes the stock uninvestable for me.

There’s clearly a lot to like with the business, especially its rail operations. But I’m looking for investment opportunities that carry a bit less risk.

The post Should I buy FirstGroup shares? appeared first on The Motley Fool UK.

The FTSE 250 bus and rail operator’s share price is up 38.27% over the last three months and while annual growth of 11.65% isn’t quite as exciting, longer-term investors are on a roll.

The private sector provider of public transport runs First Bus, the UK’s second-largest regional bus operator, and First Rail, the UK’s largest rail operator with contracts for Avanti, Great Western Railway and South Western Railway. Passengers may gripe about UK rail services, but FirstGroup investors have little to complain about.

From bus lane to fast lane

If I’d invested £5,000 in the company three years ago, I’d have seen my money grow by 346.75%. Today, I’d have a whopping £22,338. While that kind of return grabs the eye, hindsight won’t help me get any richer. The big question is where the FirstGroup share price goes next?

Last month, the £1bn group reported that adjusted attributable profit had more than doubled to £82.1m, beating expectations. Net debt of £3.9m in 2022 turned into a net cash position of £109.9m, despite heavy investment to electrify its bus fleet.

This helped reverse disappointment over the government’s move to nationalise FirstGroup’s TransPennine Express (TPE) service in May, after months of cancellations and woeful service. In a further blow, FirstGroup has been hit by repeated rail strikes and the unions aren’t done yet.

Despite its share price success, the stock isn’t expensive trading at 14.1 times earnings. While it only yields 2.5%, that’s nicely covered 2.8 times by earnings, giving plenty of scope for growth. Also, it only resumed its dividends in 2022, after dropping them during the pandemic. That year, management paid 1.1p a share. It jumped to 3.8p in 2023, a rise of 245%. 

The yield is forecast to keep rising to hit 2.84% in 2024 and 3.15% in 2025. Management has further rewarded shareholders with a £75m share buyback programme. It’s planning a £115m follow up, subject to shareholder approval.

I’ll bide my time with this one

Inevitably, there are threats. Train strikes are dragging on. Losing the TransPennine Express contract due to poor performance is embarrassing. Government policy towards the railways could change if Labour wins the next election. Plenty in the party would support more nationalisations, although leader Sir Keir Starmer seems likely to face more pressing priorities.

Yet today, momentum is with FirstGroup. Despite that, I’m struggling to whip up the enthusiasm to buy it. Bus and rail isn’t the most exciting area and passenger numbers could fall if we get a recession. Last year, group revenues fell £829m to £4.76bn. Its operations requires a huge amount of investment, as its decarbonisation efforts show.

That brilliant three-year performance may be misleading. Much of it is down to a post-pandemic rebound, as Covid lockdowns hit FirstGroup hard. A repeat performance is unlikely. I’ve added it to my watchlist and will keep close tabs on its journey. I won’t buy FirstGroup today, but that could change if it stays on the right track.

The post If I’d invested £5k in FirstGroup shares 3 years ago here’s what I’d have today appeared first on The Motley Fool UK.

For this financial year (to March 2024) the FTSE 250 firm carries a handy-if-unspectacular 2.8% dividend yield. For next year the reading moves to 3.2%.

Clearly those dividend yields aren’t the biggest that investors can currently enjoy. But the rapid rate at which shareholder payouts are tipped to rise suggests the company could still be a great buy for passive income.

But how realistic are current dividend forecasts? And do the possible rewards of owning FirstGroup shares outweigh the risks?

Rapid dividend growth

Dividends at the transport business returned in financial 2022 as it got its debt problems under control and passengers returned following the pandemic. It paid a 1.1p per share reward back then, and further progress last year saw it hike payouts to 3.8p.

Dividend growth is tipped to slow down from these electrifying levels. But pace at which they are tipped to increase remains impressive.

A 4p per share dividend is expected for the current 12-months, up 5% year on year. In the following two years, payouts are tipped to soar 15% and 17% respectively, to 4.6p and 5.4p.

I believe there’s a great chance FirstGroup shares will produce the dividends City analysts are predicting too. Dividend cover ranges between 2.6 times and 3 times through the next three years. A reminder that any reading above 2 times provides a wide margin of safety.

As I’ve said, the company has worked hard to repair its balance sheet, delivered through a combination of disposals and impressive cost-cutting. And this could give it extra financial ammunition to again raise dividends sharply over the short-to-medium term.

It ended the last financial year with adjusted net cash of £109.9m. And last month it announced plans to repurchase an additional £115m worth of shares using proceeds from disposals in North America. It had already launched a £75m share buyback programme in December.

Moving on

So is now to buy FirstGroup shares? Well the direction of travel from the lows of the pandemic has clearly been impressive. And the business is confident it can keep this momentum going.

It’s investing in its bus fleet in areas like electrification. It’s also pursuing growth opportunities across its rail operations.

However, as an potential investor there are still certain things that concern me. The constant threat of earnings-crippling industrial action is one. So is the withdrawal of key contracts (FirstGroup had its TransPennine Express franchise rescinded by the government for poor performance earlier this year).

Finally, I’m also wary that passenger numbers may struggle to reach pre-pandemic levels as home working becomes more common. I will continue to watch FirstGroup shares closely. But, right now, I’d rather spend my money on other UK dividend shares.

The post Here’s the dividend forecast for FirstGroup shares to 2026! appeared first on The Motley Fool UK.