After Thomas Cook, could this transport stock be a better bet?

Much has been written about the sad demise of Thomas Cook. Arguably, the warning signs were there for some time, leading to the stock being the most shorted on the London market. Weak trading conditions, Brexit, and high-debt all no doubt played a part in the company’s collapse, amid failed rescue talks.

On reading the news, I trawled through a list of travel and leisure stocks to see if any shares could be worth a closer examination. One, in particular, caught my eye.

Easy ride?

FirstGroup (LSE: FGP) might not be the first company that springs to mind when you think of travel, yet the business carries 2bn passengers a year on its buses, trains, and school transportation. The group also manages, operates, and maintains a combined fleet of 50,000 vehicles. 

In particular, the company is focussed on the US, with 63% of the groups’ portfolio emanating from North America. With First Student, and a fleet of 42,500 yellow school buses, the company is the largest school-to-home student transportation provider in the country. In addition, the company owns the iconic Greyhound bus brand, which still offers scheduled intercity links to over 2,000 destinations.

Despite the increase in the stock price of almost 50% over the past year, the price-to-earnings ratio is at an attractive figure of 10, suggesting the company could be trading below its intrinsic value.

I think the current stock price could be suppressed due to concerns over the £900m of debt that FirstGroup reported in March 2019. 

Mind the gap

Although the figure is high, I don’t think the situation is as bad as it seems at first glance. Most of this debt is held at fixed interest rates and, according to the report, revenue has increased over the previous year. Net debt to EBITDA was stated to be 1.3, which does not overly concern me.

It has also been suggested that FirstGroup could unlock value in the future by selling off the Greyhound brand. Investors will be pleased to hear that the stock does not appear to be shorted in the market at the moment, despite the debt. 

In my view, the company is well-positioned against its competition. As well as its strong existing foothold in the US and the UK, it has been testing autonomous vehicles since 2017. It is set to be the first company testing autonomous vehicles on UK roads.

With the majority of FirstGroup’s revenue coming from the US and the UK, unusually for this sector I think the company will be able to ride out a no-deal Brexit, although it may experience some pain. 

Along with the potential sale of the Greyhound portion of the business, I would expect other parts of FirstGroup to split, with First Bus a likely candidate to break away soon. These steps could help return value to investors and pay down the debt that the company holds. 

I will be looking closely at FirstGroup, and suspect it could be an interesting ride for investors.