The fund manager Peter Lynch was known for his theory that you should “buy what you know”. Of course, this was a bit more than simply buying the brands you encounter in your day-to-day shopping. Lynch also meant companies that you interact with through your job, or through being part of an industry, and he pointed out that you still had to do your homework to understand the business, balance sheet and valuation. But the logic is clear: sometimes the service you get helps you see why a company makes sense as an investment.
For me, Trainline (LSE: TRN) is a good example of this. The company specialises in selling rail tickets for the entire UK rail network. As someone who does a lot of long train journeys outside London, I find it useful in helping me to find the quickest route and the cheapest ticket, all for a low booking fee. Customer service is also good: in the cases when I’ve accidentally bought more tickets than I need, they have been fine with cancelling them and refunding me, provided I give a reasonable amount of notice.
Is Trainline a good stock to buy?
Of course, Trainline is not universally popular. The RMT trade union recently accused Trainline of ripping off customers and not properly updating timetables to account for delays. However, since the RMT represents those who work in station ticket offices, this should be taken with a pinch of salt. Trainline’s popularity suggests that many users feel that it delivers a far greater degree of convenience compared with ticket machines.
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While there has been talk about the UK government building its own app – especially if the rail network is gradually taken into public ownership over the next five years – the realistic chances of this seem low to me. In any case, Trainline has been diversifying its model, branching out into bus travel (including National Express in the UK), as well as moving into continental Europe (where growing competition between multiple operators creates an opportunity for a single website).
With rail transport being seen as the green alternative to roads, it’s not surprising that Trainline’s revenue has been growing quickly, nearly doubling between 2019 and 2024. It has also managed to expand its operating margins, which are now nearly 20%, and it has a double-digit return on capital employed. Debt is moderate, which should enable it to withstand any downturn. All told, the valuation of 24 times the forecast earnings for 2025 seems reasonable.
Trainline’s shares are also benefiting from short-term momentum. Several brokers have upgraded their earnings forecasts in light of its string of half-year earnings, which caused its shares to jump by more than 20% over the last month. The price is above both the 50-day and 200-day moving average. I would therefore go long at the current price of 404p at £6 per 1p, with a stop-loss of 254p. This would give you a total downside of £900.
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