Share of the week: Too rich after quick gains?

One of the FTSE 350's top performers, strengthening financials saw National Express sprint 14% higher to within a whisker of a new six-year high this week. Shares in the train and coach company have now recovered nearly all their 17% slump suffered in the first six weeks of 2016. However, while the future certainly looks much more promising, are the shares still good value?

An "excellent" first full year for the new c2c London-to-Southend rail franchise helped drive group revenue 2.8% higher to £1.9 billion in 2015, up 3.8% at constant currency. A new automatic refund service if its trains are delayed takes some of the stress off commuters, too. 

Tackling costs at its UK coach business and its new five-year "Bus Alliance" initiative meant operating profit jumped 16% to £194 million. A first for the UK, the alliance links National Express with local authorities in the West Midlands.

Adjusted pre-tax profit surged by a quarter to £150 million, giving earnings per share (EPS) of 23.4p, up by 24%. On a statutory basis, which includes hefty restructuring costs and onerous contracts booked in 2014, pre-tax profit jumped by 87% to £124.4 million.

National Express has enviable regional scope in Europe, America and the Middle East. After a successful North American school bus bid season, an average 2.8% price rise across all contracts offset wage inflation and there's good progress on acquisitions, with five deals completed in the period. Spanish subsidiary ALSA enjoyed record passenger numbers and nearly 6% growth in operating profit.

Spend on acquisitions and expansion projects took net debt above £745 million, up 12%, with significant services launched within the German rail and Bahrain bus markets. Along with current contracts, national Express is also working on a further three German rail bids worth €3 billion, has a "strong bid" for the Manchester Metrolink tram system, and has been shortlisted for other contracts in Europe and the Middle East.

Although free cash flow fell by a third, it still stands at a healthy £111 million, which supports a growing dividend. Double-digit growth takes the 2015 payout to 11.33p this year, twice covered by earnings. It's tipped to hit 12.3p this year, giving a prospective yield of 3.7%.

Profit in 2017 could come under pressure from headwinds from its Spanish long-distance bus contracts, which represent up to 40% of the division, although this should be offset by cost savings, including fuel.

A brighter future

"Longer-term, clarity over future fuel savings and potential Spanish margin pressures indicates a more positive result from FY18e onwards than previously expected," explains Investec analyst Alex Paterson.

With a brighter future, Paterson has increased his EPS forecasts by 3-4%, triggering an 8% boost in his target price to 335p. As this is just a smidge above current levels, the analyst has maintained his 'hold' recommendation.

"We continue to believe National Express is a high quality operator, and appreciate the geographic and regulatory diversification of the group. Having said this, we believe the current valuation fully captures these strengths, and prefer Go-Ahead (buy, target price 2,800p) due to potential cash returns and a c.10% discount on FY16e [price/earnings (PE)].”

Currently, National Express reads on about 13.5 times forward earnings. That's not particularly scary by historical standard, but Go-Ahead trades on 10.9 times, and both Stagecoach and FirstGroup on single-digit multiples.

However, win more contracts, or make earnings-enhancing acquisitions, and National Express is in play again.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.