Stagecoach Group (stagecoach.com) is the UK’s leading bus and coach operator with a rail franchise business on the side.
As a dividend-focused investor, I find Stagecoach an interesting company because it’s a market leader, it operates in a relatively defensive sector and, at a share price of 130p, it has a dividend yield of almost 6%.
These are all attractive features and it’s why I wanted to take a closer look.
However, when I glanced at the stock’s long-term price chart I was somewhat surprised to see very large peaks and troughs, spread out over the last 20 years.
For shareholders who’ve been with Stagecoach since the late 90s, this has clearly not been an enjoyable ride. But with the price now back down towards the lower end of its twenty-year range it appears, at first glance, as if this could be a good buying opportunity.
But then again, first appearances can be deceiving.
You can download my full review of Stagecoach below, along with the rest of this month’s Master Investor magazine:
John, it would be great if you share the usual metrics, such as PD10, for Stagecoach.
Do they have a crippling pension burden now that Stan, Jack & Blakey are retired?
John Kingham says
Stagecoach is ranked 42nd on my stock screen out of about 200 companies. That’s quite high up and is primarily because of the current low valuation relative to past earnings and dividends.
PE10 is 6.6, which is extremely low.
PD10 is 13.9, ditto.
However, things start to go awry when you look at company-related metrics rather than price-related ones.
10yr Growth Rate = 2%, which is slightly below inflation.
10yr Growth Quality = 75.7%. This measures how often revenues, earnings and dividends went up, and 75% is okay but not great. It means revenues, earnings and dividends were, on average, flat or declining 25% of the time.
10yr Profitability = 8.8%. That’s the average of return on sales (3.6%) and returns on capital (14%). So profit margins (on sales) are pretty thin, which is to be expected in this sort of business. Returns on capital are actually quite good, possibly suggesting that Stagecoach is a more efficiently run than its competitors (which I think is probably true).
Debt Ratio (debt to 10yr average profit) = 3.8. This is quite high but not too high for a theoretically defensive company like Stagecoach.
Capex Ratio (10yr ratio of capex to profit) = 141%. This is quite high, but that’s what I’d expect from a company that has to invest in busses before it can generate profits from those busses.
Acquisition Ratio (10yr acquisitions to profits) = 14%, so the company hasn’t been very acquisitive in the last decade.
Pension Ratio (total pension liabilities to 10yr average profits) = 21.5 (£2.4 billion)
That pension ratio is bad news. My upper limit is 10x, so 21x is very risky. Also, the scheme has a £140 million deficit which, if you assume it’s debt (which it effectively is), pushes the debt ratio up to 5.1 and that’s above my 5x limit.
So in summary Stagecoach is a well-run bus business that is the clear market leader with not much in the way of obvious growth opportunities. It has a fair bit of debt and a massive pension scheme.
There is also the risk of disruption by low-cost technologies such as autonomous electric taxis, but on the other hand live GPS-based bus location and arrival time updates to your phone are making bus use much better, so it isn’t clear yet whether bus use will decline or prosper over the next decade.
But either way, Stagecoach’s debts and pension and lack of growth make it a no-go for me.
You asked John to show you a metric based on past 10 years profits, when he just explained the company changed dramatically with the sale of US bus business and existing the rail franchises.
It is clear in this case PE10 has no relevance at all, you divide the stock price by the average earnings per share. Those earnings were for a company which is completely different with what it would be tomorrow! Has no information value whatsoever!
Agree with John on his analysis.
John Kingham says
This is a good point.
Management are planning to ditch the rail business entirely, so we have to strip out historic returns from the rail business to get a better idea of how the bus business alone has performed.
Here’s a quick summary of operating profits from the UK bus business:
2010 = £126m
Increases to £187m by 2013
Steadily decreases to £128m in 2019.
So operating profits in the UK bus business have gone nowhere for about a decade.
Given that management have set the new lower dividend to be sustainable by the bus business alone, I think the current dividend is a reasonable proxy for the bus businesses earnings power.
However, give that it has shown no consistent ability to grow, and that profits have steadily declined for the last six years or so, I’d say there’s a serious cloud hanging over the ability of the bus business to sustain (let alone grow) that dividend over the next ten years.
Perhaps it can, but I don’t think I’d bet my house on it (or £50 for that matter).
Hi, I am new to this site, may I know why “10yr Growth Quality” is arrived after divided by 37. What is the relevance of 37
John Kingham says
Hi Vijay, sorry I’m not sure what you mean. Can you let me know where I said divide by 37?
Let me be clear, in the company analysis excel sheet v2, the 10y growth quality was calcualted as sum of years revenue, earnings, dividends went up and the total sum was divided by 37 to arrive at the final figure.
Ex. # Yrs revenue went up 9
# Yrs earnings went up 8
# Yrs dividend went up 8
# Yrs dividend was covered 10
10yr Growth Quality (min 50%) =( (9+8+8+10)/37)=94.6%
Here, why 37 was used as denominator?
John Kingham says
Hi Vijay, okay thanks, I understand now.
The denominator is 37 because in a ten-year period, revenues, earnings and dividends can go up a maximum of nine-times each, because the number of increases is always one less than the number of years we’re looking at (e.g. with two years there can be only one increase, i.e. from year one to two).
Also, the maximum number of years where the dividend can be covered is ten.
So we have:
max dividend increase = 9
max earnings increase = 9
max revenue increase = 9
max dividend cover = 10
So the maximum score is 37, and if we divide that by 37 we get a 100% score. Lower scores that are divided by 37 then get a proportionally lower percentage score.
Hopefully that makes sense?
Thanks for clearing my doubt.
I am really hooked to your philosophy and strategy; I would like to apply the same principles in Indian Market.
If possible, what are the minimum figures I should use in the context of Indian market like net margin (min5%) because Indian GDP growth and inflation and interest rates are different than UK.
I know you are majorily concentrating in UK Market but as you said other country exposure is also must. So please share the minimum percentage details in respect of India Market and it may be helpful to your readers too
John Kingham says
It’s an interesting question but I wouldn’t know what metrics are suitable for the Indian market as I have no experience with it.
As a general rule though I would expect things like return on sales (e.g. 5%) and return on capital (e.g. 10%) to be applicable internationally, assuming the market in question is relatively open to international competition.
John, Interesting article on a relatively uninteresting business I suppose.
Not one I’d invest in as it is a largely people intensive and capital intensive business as you have pointed out, coupled with high debts and capital expenses.
A couple of other risk factors, are what regulation might happen in London, given we have a rather less than predictable and politically driven London Mayor.
If his actions on congestion and environmental extend to banning all fossil fuel buses in London in preference for electrical vehicles, the capital costs will be enormous.
Whilst supposed running costs are said to be lower for electric vehicles, they are exposed to huge depreciation due to their much high prices.
Writing off the capital value of all London buses would be an enormous set back, and would hang over the companies profits for many years.
Driverless? — I guess it is possible but the UK government can’t really be relied on to ever pass regulation on such a new fangled idea, could it?
Definitely a good story and possible an upswing potential in the share price, but such an upswing could be had from the index anyhow – Stagecoach as an investment, maybe not!
John Kingham says
Hi LR, that’s an interesting point about electric busses. I guess it’s likely at some point, possibly very likely within the next ten years given that we’re supposed to be at net zero carbon emissions by 2050.
I assume (possibly naively) that there would be a reasonable amount of notice, so that old busses could be pensioned off and replaced at something close to the normal replacement rate.
However, having seen the new rules for the London Clean Air Zone and how people are being effectively forced to sell diesels that they only bought in the first place because of government incentives (i.e. lower car taxes than petrol cars), I think it’s quite possible that the PM will come up with some sort of attention-grabbing scheme to make all busses electric by the end of next year!
Driverless buses already a reality in the UK albeit on a trial basis in the UK. Massive cost saving on wages which train companies can’t match due to unions.