The year started off very positively for National Express (LSE: NEX). In fact, January and February saw “outstanding numbers“, and the group looked as if it was going to continue its strong growth. But the pandemic has had a devastating effect on the FTSE 250 stock. Passenger numbers have plunged, second-quarter earnings showed heavy losses and its share price has dropped by over 70% since March. Nevertheless, despite current pessimism surrounding the stock, I remain optimistic. In fact, I reckon in the long term, it could quadruple your money. Here’s why.
An excellent track record
National Express has seen tremendous growth over the past few years, with operating profits up from £193.5m in 2015 to nearly £300m in 2019. It has benefited from diversification of revenues, with operations in the US, Spain and Germany. The company also made the shrewd move of exiting the UK rail business in 2017, which has since led to higher profit margins and less risk. Consequently, the FTSE 250 stock has seen its share price nearly double over these years.
The effects of coronavirus
Evidently, for all companies in the travel sector, the pandemic has had a severe effect. For example, in April, revenues fell by 57% on a year-on-year basis, and half-year results showed a £30m underlying loss. Free cash flow was also in negative territory. This meant that the group was forced to reduce operating costs by £100m per month and suspend the dividend.
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In terms of the balance sheet, net debt has also increased to over £1.3bn. As a result, net debt-to-underlying EBITDA rose to 3.8x. This is significantly higher than the 1.5-2x that the company aims for. The firm will therefore need a return to profitability quickly in order to start reducing this debt.
Nevertheless, I’m still confident about the future. Following a share placing that raised £235m, and government support, National Express looks in good shape to thrive following the crisis. With competitors bound to collapse, this should also allow it to increase its market share.
How could this FTSE 250 stock quadruple your money?
As mentioned before, I believe that National Express shares could quadruple your money in the long term. There are two reasons why. Firstly, there is significant upside. Although I can’t see an imminent recovery, the share price does still look far too cheap. For example, even in the midst of the pandemic, the share price was able to recover to 280p, before falling back significantly to its current price of 118p. As a result, if the group can return to some sort of normality, it would not be unreasonable to expect shares to start climbing towards its pre-Covid price of 480p.
There is also the potential of dividend payments. In the past, the group has had a very strong dividend record, rising from 10.6p per share in 2015 to 15.33p per share in 2019. Although management has suspended the dividend for the time being, it should be back next year. This could mean a prospective yield of around 10% at its current price. Reinvesting dividends could help in quadrupling your money.
All in all, this FTSE 250 stock does look majorly oversold. I believe significant bad news is already factored in to the price, and gains are imminent. Like all other travel stocks, the shares are risky, but I think it’s also a risk worth taking.
