Stagecoach moves up a gear and AA continues to invest despite growing debts

Wednesday, April 3, 2019 - 10:03

“Sterling made a small comeback on Wednesday morning, up 0.4% against the US dollar and gaining 0.3% against the euro, as the Brexit chaos rumbles on. That was good news for a host of UK-focused stocks including Royal Bank of Scotland, Taylor Wimpey and Sainsbury’s.

“Oil prices were also in fashion, nudging very close to $70 a barrel. However the commodity price gain wasn’t enough to lift oil producers BP and Royal Dutch Shell whose shares slipped in early trading,” says Russ Mould, Investment Director at AJ Bell.

Stagecoach

Stagecoach seems to be getting its house in order as it tries to make the business leaner and meaner. At the same time trading in its rail arm is improving, all helping the share price to chug higher.

“The disposal of its North American operations is in motion which is a good job as that remains the weakest part of its business. Its rail operations are looking more promising and a seemingly disciplined approach to only wanting bus contracts that generate a financial return on the money invested is very sensible.

“The public transport sector has been unloved for a long time and, if you are a commuter or regular traveller, you’ll know why. Many rail franchises haven’t performed well, buses are held up by endless road congestion and regional routes are being scaled back amid financial pressures on the operators.

“The name of the game for Stagecoach is flawless execution and not allocating capital unless there is a good chance of making a positive return. Having previously expanded overseas, the business is now shrinking back to a UK focus.

“Management are having to work hard to ensure the trimmed down business still makes money, clearly giving up the dream of mass scale in preference of making positive earnings from a smaller, more manageable base.”

AA

“You really need to be a debt expert to read results from roadside assistance provider AA properly. Its borrowings are around eight times earnings so understanding when certain debt is due and how the company has refinanced its balance sheet are highly relevant considerations.

“To put this number in context, a ratio of between two and three times earnings is usually seen as a reasonable limit, depending on the type of company.

“Having secured a refinancing package in July last year the company, which does at least generate plenty of cash, has bought itself some breathing space and has bravely continued to invest in the business.

“The money has gone into tangible things like frontline services, people and marketing. The number of paid personal memberships is down although is somewhat offset by the growth in business-to-business contracts – where AA’s services are offered to, for example, customers of Lloyds Bank with eligible accounts.

“In this context the agreement with Admiral today to provide services to its motor insurance customers is important.

“Chief executive Simon Breakwell, appointed in September 2017, is doing a lot of the right things to get the AA back on the road to a sustainable future, but the financial position of the company means he has very little margin for error.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market comment is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.