Sometimes I can wait ages for a bus and then suddenly there’s a flurry of action. It’s been a somewhat similar story for shareholders in Stagecoach (LSE: SGC) lately, with the shares moving up and down markedly this month. Over the past year, the Stagecoach share price has fallen 3%, at the time of writing this article yesterday.
Below I look at what’s driving the price movement – and what might come next.
Decent interim results
Yesterday, Stagecoach issued its interim results covering the six months to the end of October. These contained some good news. Revenue of £579m beat the equivalent period last year, which was heavily affected by pandemic restrictions. Pre-tax profit came in at £31m and earnings per share were 1.9p. The company is cash flow positive. It also reduced net debt from £313m to £268m.
All of that suggests to me that the business is moving in a positive direction. It also suggests that the worst of the pandemic impact may now be in Stagecoach’s rear view mirror.
However, there are still some grounds for concern that I think may be troubling investors. For example, for most of November, passenger journeys were at over 70% of the equivalent 2019 levels. But that figure has since softened, due to factors such as pandemic variant concerns. This shows that sudden demand shocks remain an ongoing risk to the company’s revenues and profits. But more worryingly, the passenger recovery of “over 70%” seems fairly weak to me. It means that around a quarter of all passenger journeys that were being taken before the pandemic have not rematerialised to date. Compare that to recovery in retail and hospitality, for example, where some operators have recovered or surpassed their 2019 levels of customer demand. It may be that there have been structural shifts in working patterns and willingness to travel on buses. That threatens both revenues and profits at Stagecoach.
Merger speculation
Another driver for movements in the share price in recent months has been speculation around a possible combination with rival National Express. The interim results were vague on this, saying that “constructive discussions are continuing with National Express Group plc on a potential combination of both groups that would deliver strong value creation for both sets of shareholders”.
That doesn’t reveal much, although it does suggest that getting a good deal for Stagecoach shareholders, not just National Express investors, could be a sticking point in the discussions. As time goes on, I detect a limited hunger to do a deal here. If that turns out to be the case and no merger materialises, it could drive the Stagecoach share price lower. But I reckon the investment case for the company doesn’t require a merger. So longer term I’m not worried if it doesn’t happen.
My next move on Stagecoach
The possibility of a takeover premium has boosted the Stagecoach share price. Yet I feel that improving demand and profitability should help to boost the company over the long term, with or without a merger. While I have concerns about the limits of demand recovery, I thought the interim results showed a company in recovery mode. If that continues for the full year, it could help support a higher share price. I will continue to hold my shares.
