Hunting for stock market bargains in the form of underperforming shares is a key part of my investing strategy. However, I find it’s also worth keeping an eye on the top risers to see why these companies are doing well. Indeed, one FTSE 250 growth stock on my watchlist has enjoyed an exceptional week of gains.
I’m talking about Trainline (LSE: TRN), which is outperforming the index by nearly 50% in 2022. Let’s explore why I think it could be on track for even bigger returns in the years ahead.
Positive guidance
In a trading update released on Wednesday, the digital rail and coach platform announced impressive results for the first four months of FY23. It also boosted its guidance for the remainder of the year across a range of performance metrics. This took the market by storm with the Trainline share price soaring 21% that day.
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The pandemic wasn’t easy for the company as passenger numbers plummeted, but it has returned to strength faster than expected. Net ticket sales increased 16% compared to the same period in FY20, before Covid-19 had a material impact on the business.
Turning to the future, Trainline anticipates net ticket sales growth of between 18% to 27% and revenue growth ranging from 22% to 31%. These figures are again measured against FY20, rather than its pandemic slump.
Not only is domestic rail travel rebounding at an impressive rate across Europe, but tourists are also returning strongly, with Americans leading the way.
Jody Ford, Trainline CEO
The group also predicts adjusted EBITDA as a percentage of net ticket sales will be between 1.9% and 2.1%. Impressive stuff, in my view.
Rail strikes
It’s not all rosy for this growth stock, however. Industrial action launched by the National Union of Rail, Maritime and Transport Workers (RMT) caused huge disruption across the UK network last month when 50,000 workers staged a walkout.
Further mass rail strikes later this summer could happen, the union’s general secretary Mick Lynch has said. With no resolution in sight to negotiations with Network Rail and other operators, I’m concerned that Trainline’s upgraded guidance overlooks this challenge and could be too optimistic as a result.
Recent international expansion means the group now covers 80% of Europe’s rail routes. It operates in 45 countries. However, the UK remains its largest market by far. Last year, the company generated 89% of its revenue and 91% of its gross profit in Britain. Accordingly, more domestic strikes could be a particularly acute headwind for the Trainline share price in my view.
Why I’d buy this growth stock
While I’m aware of the risks, I invest with a long-term horizon. Nationwide rail strikes are thankfully rare events — these have been the first since 1995. Although the next few months could be challenging, I don’t think it’s likely to be a permanent state of affairs.
I believe longer-term developments — such as growing environmental consciousness — should drive rail passenger numbers higher. I also view Trainline as being at the forefront of online and mobile ticketing trends across European rail.
Overall, I think this growth stock is well-positioned to capitalise on a huge and growing market. I view it as one of the top stocks on my watchlist currently and I might buy in July.
