Last week, I had the dubious pleasure* of taking a coach owned by Stagecoach (LON:SGC) . For research purposes, of course, and in the hours spent rolling along dreary roads I got to thinking - as I suspect most investors do - about the economics of the box I was sitting in. It was reasonably well occupied. Even so, the fares charged by these transport companies - and we can easily extend this example to the low-cost airlines, too - still surprise people. My initial guess is that it has something to do with our economic history - we just haven't quite got to grips the size and scale of the efficiencies these enormous companies can squeeze out of a relatively simple, commoditised service. Relentless focus on price and efficiency is, when you think about it, arelatively recent obsession.
Like any dutiful investor, then, I came home and fired up a few annual reports. Were they in line with my expectations? Did I understand the business? Perhaps more interestingly - is there any value there? To step back a second, I had expected an indebted (revenues seem stable and predictable, which encourages leverage) business earning probably relatively close to its cost of capital. It doesn't sound too attractive at the moment, but the economics of the industry do appeal to me. It strikes me as being a stable sector. Players in transport tend to be big and entrenched, likely partly because of the dual benefit of being more efficient in a national market and navigating a sector which has strong links to the Government. I don't think it's too much of a stretch to pencil in at least some growth in the wider market, too - something seems likely to become a discouraging factor in oil use in the next couple of decades, whether it's the rising baseline cost or climate related. Ways of efficiently getting a large number of people from A to B seem like one of the better economic bets I can make.
The low down
It turned out to a be a pretty decent guess. Stagecoach Group - which I should say now does far more than just the coach stuff I was specifically thinking of, including US operations, UK Rail operations and more local businesses - do mostly tick…
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