Analysts unfazed by Stagecoach warning

Profit warnings from its UK bus and North America businesses pushed Stagecoach's shares south on Wednesday, wiping out the gains made after it won the new eight-year InterCity East Coast rail franchise a fortnight ago. Its profit mix has now been altered, but management are confident its share of Virgin Rail will offset this disappointment.

First-half revenue rose by nearly 5% to £1.5 billion and total operating profit increased by nearly 3% to £129.8 million. Earnings per share (EPS) were 3% higher at 15.1p before intangible asset expenses and exceptional items were factored out. Management gave a 10% boost to its interim dividend to 3.2p, in line with its strategy of setting it at one third of the value of the previous full financial year.

Stagecoach's UK bus division disappointed with weaker profits in recent weeks causing it to lower its forward guidance. Political risks also remain, but management say they are still positive on its regional bus operations' outlook, especially with lower oil prices keeping fuel costs low - although fuel will also be lower for private transport. Poor weather and tough competition also saw its North America business lower its profit guidance, but these are expected to be offset by its share of Virgin Rail operations, leaving its group guidance remains unchanged.

"Overall the Group is in excellent financial shape and we are well placed to drive value through new opportunities in our core bus and rail markets," said chief executive, Martin Griffiths. "While we have changed our view of the likely divisional mix of profit for the year ending 30 April 2015, with lower expected operating profit from our regional UK Bus and North America businesses broadly offset by other areas, we remain on course to achieve our expected adjusted earnings per share for the year."

In its rail business, Stagecoach continued to see passenger volume growth thanks to its government partnership, investment, low fares and joint venture projects, and it won major contracts with New InterCity East Coast Franchise and West Coast Trains in the period. The firm also hopes to win the new South West Trains and East Midlands Trains franchises in the second half of 2015 as well as the TransPennine Express franchise, of which it is down to the last three.

Despite the profit warnings, analysts are still bullish on Stagecoach, with Investec, JP Morgan and Panmure Gordon retaining their positive recommendations. Panmure Gorgon analysts said:

We expect full-year earnings to be broadly unchanged as lower rail earnings are offset by progression elsewhere. The outlook for next year and beyond, however, remains exciting, primarily driven by a strong bounce in rail earnings (partly reflecting East Coast) and further improvements in UK bus and North America. We retain our 'buy' recommendation and 450p target price.

The shares fell nearly 9% to 373p by early afternoon, giving the stock a forward price/earnings multiple of 15 times, according to Bloomberg data.

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