Today, Stagecoach (LSE: SGC) reported adjusted earnings per share rose 2.7% to 26.7 pence. This had slightly exceeded analysts expectations of 25.9 pence, but was broadly in line with managements expectations. Shares in Stagecoach remain mostly unchanged at 406.5 pence during morning trading.
Revenues grew by 9.4% to 3.2 billion, as its rail operations reported like-for-like revenue growth of 8.7% and this years results included the companys new East Coast rail franchise. However, operating margins fell across the group, except for its London bus operations, whichbenefited from a one-off 3.0 million release of insurance provisions.
UK rail margins fell from 2.7% last year to 1.8%, but this excludes its Virgin Rail Group joint venture in the West Coast rail franchise. The West Coast rail franchise operating margins rose to 5.5%, from 0.6% last year, as it benefited from the shift to a new commercial franchise, where previously it ran under a management contract.
Lower oil prices reduce demand for bus travel, particularly long distance coach services, as it reduces car operating costs. This reduces the cost competitive advantage of bus and coach services. Because US fuel duties are lower than in Europe, this shift in competitive advantage is felt more strongly in the US, hitting Stagecoachs US megabus coach services particularly hard.
Although megabus is a promising coach brand, lower oil prices would make its expansion more costly in the medium term, as profitability is likely to remain weak for some time. Together with intensifying competition in its northern UK bus routes, Stagecoach is likely to deliver weak earnings growth in the medium term.
UK bus margins may be higher for Stagecoach than for Go-Ahead Group (LSE: GOG), but recent changes in margins have been moving in the opposite direction. Go-Aheads margins outside London have improved 1 percentage point in the first half of 2015, to 12.9%, as the company was able to deliver higher fares and more contract income. Competitive pressure differ across the UK, and Go-Ahead seems to be operating in softer markets.
The end of major roadworks in Oxford and the late economic recovery in the North East means that bus passenger revenues should improve towards the end of 2015 and in 2015. This should mean that Go-Ahead is likely to deliver faster earnings growth than Stagecoach in the medium term. Go-Ahead also has a more attractive dividend yield, 3.1%, which compares to 2.6% for Stagecoach.
Airlines are better buys
Lower fuel prices reduces demand for bus and rail travel, but it increases demand for air travel. Although bus, rail and airline companies all benefit from lower fuelcosts, airlines are substantially better off in a low oil price environment.
However, airlines tend to hedge their fuel costs, which means the recent fall in the oil price has a limited benefit to airlines earnings in the short term. easyJet (LSE: EZJ) has hedged some 78% of its fuel needs until the end of September 2015, and 52% for the following year.
This means that lower oil prices take time to feed into the earnings of airlines. Legacy carriers, including International Airlines Group (LSE: IAG), have more to benefit from lower oil prices, because fuel costs represent a larger proportion of costs for their long-haul routes.
easyJet and IAG are attractively valued, with forward P/Es of 12.4 and 10.3, respectively. Recent weakness in IAGs shares following the Aer Lingus bid makes IAG a particularly compelling stock on lower oil prices.
If you are looking for reliable income-generating opportunities, The Motley Fool has a free special report that lists alternatives more aligned with your investing strategy: “The Fool’s Five Shares To Retire On”. These five large-cap shares have been selected for their income and growth prospects. The5 companies generate stable cash flows; as they benefit from their dominant market positions and broad global exposure.
The special report is free and there’s no further obligation.Click hereto get your free copy.
Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.