Best Investments: The best peak oil investments: Three mass transit operators

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The best peak oil investments: Three mass transit operators

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The Best Peak Oil Investments: Three Mass Transit Operators | Alternative Energy Stocks

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The Best Peak Oil Investments: Three Mass Transit Operators Tom Konrad, CFA

Government budgets are puttingpressure on mass transit operators, but the best public companies arelikely to benefit from the trend.

Three recent Economist articles led me to question my assumption thatrising oil prices should be good for mass transit operators. Inthe August 19th edition, there was an article about masstransit service cuts in Atlanta, as well as one about thelikelihood of risingrail fares in Britain.

In crisis, there is also opportunity. Reading beyond the gloomyheadline of the Atlanta article, it becomes clear that the MetropolitanAtlanta Rapid Transit Authority's (MARTA's) decision to cut 40 of 131bus lines has more to do with the operational inefficiencies of astate-run bus service. MARTA has several competing, subsidized,transit agencies in the Atlanta region, does not receive any subsidiesofits own, and has significant legislative constraints about how itspends its money. Inflexible rules have even forced MARTA to buybuses that itdoes not have the money to operate.

Demand for public transitservices is rising, even as transit agencies like MARTA are cuttingback. This should open up opportunities for efficient and flexible privatelyrun operators willing to fill in the gap left by the retreating publicsector.

The story behind the likelylarge increases in Britain's rail fares leads to a similarconclusion. Rising rail fares will be driven by government belt-tightening, andrail operators must negotiate with local authorities for their share ofrevenues and expenses. This seems to imply that rail operatorswill not be able to capture a share of rising revenues beyond what canbe justified by growing expenses, and may even see their marginssqueezed in coming years. But the effect on bus and coach(inter-city bus) operators should be positive, as rising rail pricesinduce commuters and travelers to seek more economical alternatives.

The Companies

I've recently been researching three London-listed transit operatorswith both bus and rail divisions. I've been aware of FirstGroupPLC(FGP.L) for some time, and the company appeared in my recentlist of nine public transit related companies. While lookingatthe holdings of the Powershares Global Progressive TransportPortfolio (PTRP)forthis series on PeakOilstocks, I came across another: StagecoachGroup,PLC (SGC.L), and Stagecoach's annual report pointed me totwo other publicly competitors: NationalExpress(NEX.L) and Arriva.

Arrivawasrecently acquired by the German government-controlled Deutsche Bahn,andso is no longer publicly traded. Although this givesinvestors one less option in the sector, another article in theEconomist predicts that Deutsche Bahn may continue looking foracquisitions as part of its growingrivalrywith the French rail operator SNCF.

Although each company treats revenue breakdown differently, eachcompany seems to earn a little more than half of their revenues frombus services and a little less than half from rail services. Allthree operate in the UK and North America, while National Express alsohas operations in Spain.

The economic downturn hurt revenue at all three firms, but all have seen revenue increase since 2009. Both FirstGroup andStagecoach Group maintained profitability through the downturn, butNational Express lost money in 2009 and went through a fairly dramaticrestructuring. It has only recently returned toprofitability.

National Express might potentially be a turn-around play, but I expecteconomic times to remain difficult, and so prefer companies with morefinancial strength. The other two seem to have adapted well tothe downturn, but Stagecoach's low debt means that the company probablyhas more flexibility to take advantage of any opportunities opened upbya retreat of public sector transit providers.

Below is a table summarizing several valuation and liquidity ratios forthe three companies.

Company
FirstGroup
NationalExpress
Stagecoach
Ticker
FGP.L
NEX.L
SGC.L
Share Price8/26/10
342.8p
222.3p
170.0p
FinancialStmtDate
3/31/10
7/29/10
4/30/10
TTM IncomeYield (PE)
8.9% (11)
0.04% (25)
9.1% (11)
Free CashFlow Yield
17.3%
2.4%
14.6%
Dividend Yield
6.0%
4.5%
3.8%
NetDebt/Equity
139%
22%
24%
CurrentRatio
79%
41%
97%

Conclusion

Of the three stocks, Stagecoach's combination of low debt, relativelystrongliquidity, and reasonable earnings multiple make it my favorite ofthese three bus and rail transit operators. Had I known aboutNational Express and Stagecoach when I was putting together my TenCleanEnergy Stocks for 2010 (in which I included FirstGroup,) Iwould have chosen Stagecoach in FirstGroup's place.

DISCLOSURE: None.DISCLAIMER: The information and tradesprovided here are for informational purposes only and are not asolicitation tobuy or sell any of these securities. Investing involves substantialrisk and youshould evaluate your own risk levels before you make any investment.Pastresults are not an indication of future performance. Please take thetime toread the full disclaimer here.

Posted by Tom Konrad on September 7, 2010 09:43 AM | The Best Peak Oil Investments: Three Mass Transit Operators

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