Company in the news: Stagecoach
Stagecoach is Britain's best bus and rail operator, says Phil Oakley. But are the shares too pricey?
Stagecoach (LSE: SGC)stands out as the UK's best bus and rail operator by some way. It has grown the profits of its bus business, while quietly building up its US division.
Last week its partnership with Virgin Rail (90% owned by Stagecoach) was awarded the East Coast rail franchise for eight years from March 2015.
This franchise has been run by the government for the last five years. The last operator, National Express, couldn't pay the premiums it promised to the government, and almost went bust. National Express had agreed to pay £1.4bn over eight years. Stagecoach is promising £2.3bn (in today's money).
Is that too much? Probably not, as long as the economy remains healthy. It has to pay the government an average of £287m a year, compared with the £225m paid by the franchise last year.
Stagecoach's promise doesn't look too reckless, given that it will grow the number of seats available by 50%, add lots of modern trains and deliver faster journey times.
The company now has a very strong position in UK rail, which could be a nice source of cash flow over the next few years.
That said, the price-to-earnings ratio of nearly 16 already prices in a decent future. If I was to own a UK transport stock, Stagecoach would be the one, but I wouldn't buy right now.
Verdict: solid hold