Shares in bus giant Stagecoach (LSE: SGC) were on a tear in November, climbing more than 60%. They have gained even more since the start of December. That is a big gain for savvy investors who bought at lows in the autumn. But I think there is more price gain to come. Stagecoach shares still look cheap to me.
The vaccine could be a boon for public transport
The main challenge for Stagecoach this year has been the drop in demand for bus services. With many people staying at home, passenger volumes have fallen sharply. However, as a vaccine is rolled out nationally, I expect that to change. Many commuters will start travelling to work regularly again. Leisure travellers will also likely feel more confident to travel by bus once more.
Getting people back on buses is clearly important for the price of Stagecoach shares. But in fact, Stagecoach has already done fairly well in getting business closer to normal levels. In an October trading statement, Stagecoach revealed its bus service was back to 93% of its normal provision. Commercial revenues were at 50%–60% of standard levels. That suggests a recovery was already under way before the latest lockdowns. As lockdowns end and the vaccine rolls out, I expect further recovery in passenger numbers.
Unlike some businesses, Stagecoach has actually been somewhat insulated from financial impact even with lower revenues. Due to the importance of public transport, it has been subsidised to keep running. In August, the Department for Transport confirmed it would continue subsidising the company to provide essential bus services in England for as long as necessary. So even a sharp fall-off in passenger demand hasn’t damaged the company’s profitability in the way it has for airlines, for example.
Stagecoach shares still look cheap to me
The company’s share price was in long-term decline even before the pandemic. Partly that reflected its mixed success in rail operations. It has since refocused on its core business expertise: buses. I think that will help it produce more consistent financial results in future even though revenue is less. Bus services may be unglamorous, but they are highly cash generative.
Even for the most recent year including some pandemic impact, the company turned in earnings per share of 6.7p. The previous year, it managed 17.4p. That means today’s share price of around 72p would equate to a prospective price-to-earnings ratio of a little more than 4 times — if it achieves such earnings again. I don’t think that will happen in the current year, with the ongoing pandemic impact. But a vaccine makes it a possibility for the following 12-month period.
Stagecoach’s last dividend, last year, came to 7.7p. If the currently suspended dividend is restored at that level, it equates to a forward yield in double digits.
With a clear focus on the bus business backed by ongoing government financial support, I expect Stagecoach to recover within the next couple of years. Even after the recent share price jump, its share price looks like good value to me. I am holding my Stagecoach shares in the expectation of an agreeable further price appreciation in the next few months.
