Any investor brave enough to have bought FirstGroup (LSE: FGP) shares during their 2020 lows in the pandemic has likely done well.
The bus and train operator has seen its stock increase several-fold since then. And the situation reminds me of a well-known quotation by Robert Arnott: “In investing, what is comfortable is rarely profitable.”
Arnott is an American businessman, investor, and writer. And he’s a strong advocate of finding value and investment potential in contrarian situations.
Back in 2020, for example, FirstGroup looked dangerous. The world was in the grip of lockdowns that devastated demand for public transport. And we still didn’t know how extensive the long-term damage to economies would be because of coronavirus.
But the implication in Arnott’s quote is that investing in uncomfortable situations can be profitable. Although it’s worth bearing in mind that all shares and businesses come with risks as well as potential. And it’s always possible to try to make a contrarian investment only to pick a duffer that whips our cash away faster than we can react.
The business has been recovering
Nevertheless, Arnott reckons that “the best investment opportunities are often scary.” And that’s how it proved to be with FirstGroup. The company has been building its revenues and profits since they suffered the big hit in 2020. And recent asset sales in the US have helped it get borrowings back under control.
With the shares around 147p on 3 July, the price is a long way from its nadir of around 30p three years earlier. And in the past year alone, the stock has risen around 13%. Although the journey has not been straight up over the past 12 months.
Things are looking so buoyant in the business right now that the company is engaged in a £115m programme of share buybacks. And firms in financial distress don’t do that. Indeed, the finances at FirstGroup look robust.
On 8 June, chief executive Graham Sutherland said the business “delivered a strong financial performance” for the trading year to March.
A positive outlook
And looking ahead, Sutherland reckons the First Bus division will deliver further earnings growth as it continues its transition to a more commercial and efficient model. The company plans to invest in both commercial and adjacent services opportunities. And as part of that, he expects additional revenue streams from the electrification of the fleet and infrastructure.
Meanwhile, in the First Rail division, Sutherland anticipates a “broadly consistent” level of contribution from the management fee-based operations. And he thinks further growth will come from the firm’s open access operations as it seeks to find ways to expand its customer offer. Indeed, the directors are focused on a pipeline of growth opportunities.
City analysts have pencilled in increases for the shareholder dividend for this year and next. And set against expectations for the trading year to March 2025, the forward-looking yield is around 3%.
Sutherland acknowledged that the broader economic and industrial relations backdrop remains challenging. And we’ve seen how economic events can disrupt operations.
But I see strong business momentum and believe the company is worth further research now, despite the strong rise in the stock since 2020.
However, I’d hope for steady progress rather than setting my heart on a rocketing share price from where it is now.
