Tom Konrad, CFA
Government budgets are putting pressure on mass transit operators, but the best public companies are likely to benefit from the trend.
Three recent Economist articles led me to question my assumption that rising oil prices should be good for mass transit operators. In the August 19th edition, there was an article about mass transit service cuts in Atlanta, as well as one about the likelihood of rising rail fares in Britain.
In crisis, there is also opportunity. Reading beyond the gloomy headline of the Atlanta article, it becomes clear that the Metropolitan Atlanta Rapid Transit Authority’s (MARTA’s) decision to cut 40 of 131 bus lines has more to do with the operational inefficiencies of a state-run bus service. MARTA has several competing, subsidized, transit agencies in the Atlanta region, does not receive any subsidies of its own, and has significant legislative constraints about how it spends its money. Inflexible rules have even forced MARTA to buy buses that it does not have the money to operate.
Demand for public transit services is rising, even as transit agencies like MARTA are cutting back. This should open up opportunities for efficient and flexible privately run operators willing to fill in the gap left by the retreating public sector.
The story behind the likely large increases in Britain’s rail fares leads to a similar conclusion. Rising rail fares will be driven by government belt-tightening, and rail operators must negotiate with local authorities for their share of revenues and expenses. This seems to imply that rail operators will not be able to capture a share of rising revenues beyond what can be justified by growing expenses, and may even see their margins squeezed in coming years. But the effect on bus and coach (inter-city bus) operators should be positive, as rising rail prices induce commuters and travelers to seek more economical alternatives.
I’ve recently been researching three London-listed transit operators with both bus and rail divisions. I’ve been aware of FirstGroup PLC (FGP.L) for some time, and the company appeared in my recent list of nine public transit related companies. While looking at the holdings of the Powershares Global Progressive Transport Portfolio (PTRP) for this series on Peak Oil stocks, I came across another: Stagecoach Group, PLC (SGC.L), and Stagecoach’s annual report pointed me to two other publicly competitors: National Express (NEX.L) and Arriva.
Arriva was recently acquired by the German government-controlled Deutsche Bahn, and so is no longer publicly traded. Although this gives investors one less option in the sector, another article in the Economist predicts that Deutsche Bahn may continue looking for acquisitions as part of its growing rivalry with the French rail operator SNCF.
Although each company treats revenue breakdown differently, each company seems to earn a little more than half of their revenues from bus services and a little less than half from rail services. All three operate in the UK and North America, while National Express also has operations in Spain.
The economic downturn hurt revenue at all three firms, but all have seen revenue increase since 2009. Both FirstGroup and Stagecoach Group maintained profitability through the downturn, but National Express lost money in 2009 and went through a fairly dramatic restructuring. It has only recently returned to profitability.
National Express might potentially be a turn-around play, but I expect economic times to remain difficult, and so prefer companies with more financial strength. The other two seem to have adapted well to the downturn, but Stagecoach’s low debt means that the company probably has more flexibility to take advantage of any opportunities opened up by a retreat of public sector transit providers.
Below is a table summarizing several valuation and liquidity ratios for the three companies.
|Share Price 8/26/10||342.8p||222.3p||170.0p|
|Financial Stmt Date||3/31/10||7/29/10||4/30/10|
|TTM Income Yield (PE)||8.9% (11)||0.04% (25)||9.1% (11)|
|Free Cash Flow Yield||17.3%||2.4%||14.6%|
Of the three stocks, Stagecoach’s combination of low debt, relatively strong liquidity, and reasonable earnings multiple make it my favorite of these three bus and rail transit operators. Had I known about Nation
al Express and Stagecoach when I was putting together my Ten Clean Energy Stocks for 2010 (in which I included FirstGroup,) I would have chosen Stagecoach in FirstGroup’s place.
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