Stagecoach Group (LSE:SGC) is a leading UK public transport company, operating in Scotland, England and Wales.
Back in January 2010, its share price was £1.72 and today it is worth 8% less at £1.58. That means if you’d bought £1,000 worth of shares 10 years ago, today they would be worth around £918. That’s not the kind of return long-term shareholders are looking to obtain!
So does it still appeal? Well, the FTSE 250 company is starting 2020 with a price-to-earnings ratio (P/E) of 8 and earnings per share (EPS) are 19p. Its shining star is its dividend yield at close to 5%. At first glance, these fundamentals look great, but do they hold up under closer scrutiny?
Back in 2015, the Stagecoach share price peaked at a resounding £4.09. That was up 137% from its 2010 price, but in the four years since, it has steadily fallen. Throughout 2019 it had a volatile time but overall rose 19%.
Letting go of losers
This share price volatility shows that some astute (and maybe lucky) investors could have made large gains, but for others, big losses would have been the outcome.
It is often said that “time in the market is more important than timing the market” and I agree, but as this one has shown, holding for the long term does not always pay off. Keeping track of the businesses you invest in is also key. You want to be investing in well-run companies with management integrity and a clear plan to make money. No one wants to hold on to losers longer than necessary.
Although Stagecoach’s financials may appear enticing on paper, its trailing P/E is closer to 42, diluting EPS to 3.8p. Other than the dividend yield, this makes it seem overvalued for what it offers. Dividend cover is only 0.5 so if push comes to shove, then a dividend cut could be on the cards.
Its profit margin is 6.5% and the operating margin is 7.6%, neither of which are particularly high, and its debt ratio is very high at 85%.
Troubling times
Two months ago, Moody’s Investors Service downgraded Stagecoach shares to Baa3, from Baa2. This downgrade reflected various changes to the business profile, the reduction in the firm’d scale and concern surrounding a decline in UK travellers taking bus journeys.
The bad news continued as its half-year revenues fell, reflecting the end of its involvement in UK franchised rail, and its chairman and co-founder Sir Brian Souter stepped down. It is also embroiled in an ongoing legal dispute with the Department for Transport after being disqualified from bidding on a rail contract.
On the bright side, it is bidding for a 12.5-year rail contract in Sweden and it has a positive outlook on the opportunity to encourage the public to travel by public transport as an environmentally-friendly alternative to cars.
Taking all of the above into account, I think the Stagecoach share price is high. The business has shrunk, it is facing increased regulation to reduce emissions and further investment costs to upgrade buses to achieve this. Plus, the legal wrangle and unclear future direction make this one stock I would avoid.