With the bulls back in the saddle, the FTSE 100 has recovered its poise and is up over 10% from its 5,414 low in March, based partly on sheer relief that the financial system didn’t collapse after the Bear Stearns fiasco. But I’m remaining cautious: there’s a danger the City is getting ahead of itself with so many uncertainties still hanging over the economy. For example, US analysts expect S&P 500 firms to grow earnings by 10% in 2008, even after a 15% decline in the first quarter. That assumes a slight loss for the second quarter, solid growth in the third and a blockbuster fourth. This looks a big ask, which suggests the recent rally could be a false dawn.
National Express (NEX), tipped as a BUY by The Sunday Telegraph
One stock that should be resilient through thick and thin is National Express. The transport operator runs bus, coach and rail passenger services in Britain, North America and Spain. Around 15% of its cost base is fuel-related. That explains the 30% slide in the stock over the past six months, as investors fret over sky-high oil prices. But the sell-off looks too harsh.
The group’s exposure to fuel costs is mitigated by hedged positions of 85% in 2008 and 40% for next year. And even in a downturn, people still need to travel to school and work. One could even argue that with rocketing pump prices, hikes in vehicle tax, environmental considerations and greater road congestion, more and more commuters will opt for public, rather than private, transport. The group is also gradually upgrading its fleet to offer passengers air-conditioning, wi-fi hotspots and power-points.
The strategy is working. Last week at its first quarter update, National Express reported strong organic growth, even accounting for the beneficial effects of an early Easter. Its UK bus, coach and rail franchises saw revenues rise by 6%, 5% and 9% respectively – even though budget travellers became less willing to spend on trips abroad. The firm’s American and Spanish operations also saw mid-single-digit improvements in the top line. The board added that “despite the economic back-drop, all operations have made a good start to the year and we have seen no adverse impact on trading in the first quarter”.
The only potential “leaf on the track” came from news that the strengthening euro had increased the sterling value of the group’s net debt by £70m to about £1bn (including a pension deficit of £30m) as at the end of March. Even so, interest payments are still a comfortable four times covered, while the firm’s banking facilities are secured until February 2010.
Given its “utility-like” qualities, the stock looks good value, trading on undemanding p/e ratios of 10.4 and 9.4 for this year and next. The 2007 dividend was a chunky 38p per share, equating to a 4% yield. The board has committed to lift this payment by 10% a year until 2010. Yes there are generic industry concerns, such as refranchising, margin pressure, exchange rates and possible Government interference. But these seem overplayed. I rate National Express as a long-term buy.
Recommendation: BUY at 957p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments