The last few years have been challenging for companies in the transport space. With so much uncertainty around hybrid working, and the future of commuting, FTSE 250 companies like Trainline (LSE:TRN) have had to fight to stay relevant. But with workers returning to the office, and life seemingly normal again, is now the perfect time to be buying shares?
What’s the story?
Trainline was founded in 1997, and operates as a technology company primarily focused on the travel industry. With a team of over 950 employees, it has emerged as a leading independent platform for rail and coach travel. Finding the balance between the slow moving rail sector and the hype friendly technology sector isn’t always easy. Some investors may be put off by the high valuation of Trainline shares, whilst others may consider the sector unattractive.
Regardless of how the company defines itself, the numbers are improving. The company reported significant revenue of £327.1m in 2023, marking an impressive 74% increase from the previous financial year.
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The word ‘recovery’ comes to mind pretty often when looking at the rest of the company’s financials. Trainline’s net income stood at £21.2m, a stark contrast to the £11.9m loss recorded in 2022. This shift from loss to profit demonstrates a company improving its financial management and operational efficiency.
Can it continue?
Trainline achieved a healthy profit margin of 6.5% in 2023. Questions remain on whether this is as good as it gets, or if the trajectory of recovery can continue. The company certainly seems to think so, with forecast ticket sales growth in the next year of between 18% and 27%, and revenue growth of between 22% and 31%.
In terms of an investment though, I suspect a lot of this growth is already reflected in the share price. The price-to-earnings (P/E) ratio of the shares at 60 times is well above the UK travel sector at 34.3 times.
A discounted cash flow calculation, which calculates an approximation of fair price, also suggests that the share price of £2.92 is about 10% above the fair value of £2.67. With a 35% growth in earnings forecast, FTSE 250 investors may get nervous if the company can’t meet these lofty expectations.
More encouragingly, Trainline recently announced an impressive £50m share buyback programme. Analysts have also suggested that high levels of free cash flow could see the company offer £500m of buybacks over the next five years.
What are the risks?
The question of remote working is still unanswered. Most workers are attending the office a few days a week, but when the time comes to renew office leases, employers have a decision to make.
Trainline appears to have a resilient strategy, and healthy enough financials to weather any short-term turmoil, but with UK rail strikes costing the company over £5m per day, the future still isn’t certain.
What’s next?
Overall, Trainline’s robust financial performance this year is indicative of its successful strategies in navigating the post-pandemic market. The company’s improved financial outlook and strong focus on innovation position it as a strong player in the rail and coach travel industry, but with so much uncertainty surrounding the world of transport in a digital world, I’m steering clear of this stock.
