Having seen the increase in the Megabus bright orange buses around New York, my curiosity was sparked. Researching the company I was somewhat surprised to find that the franchise was owned by Stagecoach Group PLC (OTC:SAGKY) of the United Kingdom.
Firstly some brief background on Stagecoach. The company operates in the bus and rail transport arenas. Their bus network operates in the U.S., Canada, and the UK. Additionally, Stagecoach owns South West Trains and East Midlands Trains along with West Coast, which is a joint venture with Virgin in the UK.
Now this may seem like an unlikely investment to thrive with oil hovering around +/- $100 a barrel and consumer purse strings stretched. Stagecoach seems to disagree and sees an opportunity as evidenced by consumers generally trading down and being cost conscious; just look at Dollar General (DG) and Family Dollar (FDO). This growth opportunity is demonstrated by a recent $68MM investment for 100 vehicles.
Passenger numbers are increasing with the North American head of Stagecoach operations recently quoted stating expectations are that numbers would be up in the region of 28%-35% over the same period last year.
This increase has the usual contributory factors: increasing fuel costs and airfares but a less obvious component is the positive environmental effect of traveling by bus. In a recent Financial Times interview Brian Souter, Stagecoach Chief Executive, he espoused this green impact publicizing that it took only two pints of fuel per passenger to travel from New York, to Washington. This aspect resonates well with Megabus' historically urban-based younger commuter.
The customer mix is however, undergoing a sea change with more middle aged, affluent but still cost conscious commuters being attracted. Not only does the attraction have a limited impact on their wallets but it also offers free Wi-Fi and onboard electrical sockets. These service offerings help distinguish Megabus from the competition, particularly independent bus operators who typically do not offer similar services.
Despite the company being focused on U.S. expansion it has not lost sight of the impact of margins on its share price. An indication of this focus was the recent disposal of its Wisconsin-based school bus operation. This gives Stagecoach the opportunity to redeploy the capital to higher margin businesses.
Of course there are challenges for the company as demonstrated by interim pre tax profits being down 18%. This fall seemed to be accepted by analysts with the flip side being margins of 18% on bus services outside of London, and Megabus revenue rising by almost 50% to $54MM.
Two final points: the stock sports a yield of around 3% to provide some insurance to markets fluctuations. I experienced at first hand the Megabus service on a recent trip from New York to Toronto. I was pleasantly surprised with the comfort, level of service and bus facilities available. Even if you are not attracted to the stock you should try out the trips. Just make sure you turn up early as seats are selling quickly.