Stagecoach (LON:SGC) released their interim report last week and as they're the kind of company I like to invest in, I thought I'd take a closer look. As you may or may not know, I use a sorted list of potential investments as a starting point and Stagecoach were the highest ranked stock on that list to publish a new report, but the question really is:
Is Stagecoach really up to scratch and at a price of around 250p, are they good value?
The first think to note is that in the past the company has provided a stable base of earnings. This stable earnings power comes primarily from the industry in which they operate. By providing public transport on their fleet of buses and trains the company’s earnings are generated from many millions of frequent and often non-discretionary cash payments. Even during recessions people have to travel. The same is true of their competitors, including FirstGroup and Go-Ahead. The average earnings of the past decade are around 13.5p per share, which means the current price is around 19 times that level (also known as the Graham and Dodd PE or PE10).
There is however, more to being a good company than simply generating stable earnings. Fortunately Stagecoach has done more by growing at more than 11% a year for many years. Although growth is not a prerequisite for a sound investment I'd rather own a growing company than one which can't even keep pace with inflation, let alone a company which is in decline (believe me, I've tried owning companies in decline and it's not pleasant). Historic growth is desirable, but it's only proof that the company could grow in the past and doesn't necessarily mean that growth will continue in the future.
But it might. There is research which suggests that a long-term ‘modal’ shift towards non-car transport is occurring, which of course includes buses and trains. If that is correct then Stagecoach and similar companies may have a relatively successful time over the next decade or more. However, it's probably best not to get too excited about the potential for a more prosperous future, but instead to simply say that the industry is likely to remain largely unchanged in the years ahead, with the possibility of some further growth.
So Stagecoach appears to be a nice stable company with relatively…
