Friday, April 28, 2017

Stagecoach

Stagecoach owns and operates buses and trains in the UK, and to a lesser extent in Europe and America.

The price is down 50% from its 2015 high, likely due to fears over Brexit, terrorism/tourism, and regulatory changes (franchising of buses).

As a result, it trades with an EV/EBIT of about 9.

They compete with other companies for government contracts for particular routes/lines in the various areas where they operate, but there are scale benefits to this type of business (existing transportation equipment, workforce, government connections) which keeps barriers to entry high. So it's always the same few companies bidding, which keeps pricing rational and profitable.

Some cities may change how they set up these contracts, in effect keeping the revenue (franchising) and paying SGC rather than what SGC normally does which is collect the revenue itself. This could lead to slightly lower margins, but over the long term I wouldn't expect this to change the nature of the industry.

ROE is consistently in the double-digits. However, while the company seeks to deploy its earnings, it has ended up growing revenue but with lower margins. In my opinion, this is still okay as there are some aspects of the business which are growing quickly but still losing money, but could have moats some day, again because of the "network" nature of the industry and the oligopoly structure this leads to.

Here is a decent article on the company with more details.

Disclosure: Author has a long position in shares of SGC.UK

3 comments:

Anonymous said...

Why do you prefer that to Go-Ahead group? Don't you think that any company involved in UK rail is in a bad business?

Veeral Shah said...

Stagecoach is better than other public transport companies, for example First Group, in the UK.

Personally, I've been using train services provided by Stagecoach, and can say, their trains are better than Go-Ahead Group and First Group. They also have good bus coverage across the UK.

However, as a sector, I don't think its a long term (or even medium-term) investment. The sector requires huge investment, PR issues, strikes, lost of contracts, etc. Although ROCE is good for Stagecoach (around 20% avg for the last 5 years), their Debt is high as well. I hope the investment works out better for Saj than I think.

Trostis said...

Kind of agree with Veeral...

Margins squeeze HoH (and will continue to do so as the franchising system is implemented regionally), defeating the revenue growth and yielding declining profits too. Increasing CAPEX, which doesn't seem to be a cyclical expenditure, but more like business as usual to keep up with the competition. All UK bus KPIs deteriorating, with increasing accidents increasing insurance premiums. Tangible assets mostly consist of vehicles, with very low residual values. Just lost the largest source of revenue, the South West Trains franchise; individual contributions to revenue are not reported, but according to some sources it could be in the order of 25-30% of total (http://www.thisismoney.co.uk/money/news/article-3337694/Turnover-South-West-Trains-tops-1-billion-time-rising-ticket-sales-rise-Government-subsidy.html)...so declining margins with declining revenue :(

All in all, it could well be an overreaction to terrorism/Brexit, but I'd say there are some significant structural changes affecting Stagecoach's future. It may not fall much deeper, but can't clearly see a lot of upside potential at this stage.

Regards.

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