Why I've Bought FirstGroup

Published in Company Comment on 10 December 2012

It's time to buy into the transport company FirstGroup (LSE:FGP).

Regular readers of the Fool will know that this is not the first time I have written about the train and bus operator FirstGroup (LSE: FGP). But, until now, I have never made this company part of my personal portfolio.

The firm has been on my watchlist for months but, having ummed and ahhed about buying in, I have finally taken the plunge.

Now is the time to buy

Why now? Well, after the disappointment around the franchise for the West Coast mainline, FirstGroup shares -- which were already out of favour -- have taken another knock. They have fallen to their lowest level for over a decade; having peaked at over 800p in the boom before the credit crunch bust, the shares are now down below 200p.

The company has been the subject of much negativity around the West Coast mainline fiasco. I don't think anything good has been written about the company for months. No one has dared tip the firm. The shares are unloved and neglected.

That's just the way I like it.

The company is now on a forward price-to-earnings (P/E) ratio of 6, and a forecast dividend yield of over 12%. This is now one of the highest-yielding large or mid-cap companies in the UK.

For me, this is just too cheap. And with that dividend yield, even if there is no capital appreciation, I will still be getting a healthy return from this share. In reality, I expect there will be plenty of capital appreciation.

But is it cheap for a reason?

Usually when companies get this cheap, and the dividend yield gets this high, this is regarded as a warning sign. The business's profits may be about to crash, as is happening with MAN Group. It may a 'buggy whip' company, in a sector with a bleak future: think of HMV or Trinity Mirror.

But none of this applies to FirstGroup. The consensus forecasts are that the company will bang out profits consistently over the next few years. The trend, if anything, is that train travel will steadily increase in the future, as petrol prices remain high. And train fares continue to rise, further boosting profits.

Of course, there are risks: the business has substantial debt, and there is also the risk that a franchise will be lost -- though I would also argue that there is an equal chance that a franchise can be gained. And the company is already priced as if it will definitely lose another franchise.

The contrarian opportunity of the moment

In fact the whole of the transport sector is currently out of favour, and I would say companies such as Go-Ahead Group and National Express are also buys.

Go-Ahead Group is on a forward P/E ratio of 9, with a forecast dividend yield of 6.5%, while National Express is on a forward P/E ratio of 7, with a predicted yield of 5.5%. But my pick remains FirstGroup.

Quite simply, FirstGroup ticks all the boxes: it is a contrarian play, it is a value play, and it is high-yielder. For me, it is the contrarian opportunity of the moment.

World-renowned investor Neil Woodford has a knack of finding shares which produce an impressive 'total return': i.e. they combine high dividend yields with substantial capital appreciation.

To read about his recent picks, and learn about the rationale behind his buys, just read our free report, "8 Shares Held By Britain's Super Investor".

> Prabhat owns shares in FirstGroup, but in none of the other companies mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

kevinksa 10 Dec 2012 , 1:09pm

Considered FCG but the x3+ EBITDA just scared me off and the dividend must be under threat to fall to say 5% so at 2.5x ish EBITDA, as divine comedy song goes "Take the National Express It'll make you smile"

countalucard 10 Dec 2012 , 3:31pm

I've also bought in on Oct 8th for the same reasons you gave.Get in while cheap,thats the Foolish way!!!

countalucard 10 Dec 2012 , 3:36pm

Another thing,i bought Lloyds at twenty nine pence back in July!!!.
Findin the Motley fool website has opened my eyes.
I've got some younger colleagues at work buying shares the Foolish way.
They will be wealthy young men in twenty or thirty years!!

Great website guys,keep up the good work!!

Clackmannan 10 Dec 2012 , 4:12pm

Prabhat, how many did you buy?.

I bought 1683 @ 187.46 today.

theredflag 10 Dec 2012 , 7:42pm

Always nice to hear when author's have backed a share with their own cash.

I'm in too and hope to add more in decemeber....

ps200 10 Dec 2012 , 7:58pm

@Clackmannan: I bought a similar amount to you, also at 187p. Here's hoping....

Prabhat

apprenticeDRL 10 Dec 2012 , 8:32pm

I bought a couple of weeks ago, mainly for the yield - even if the yield is cut to 5% as Kevinksa predicts thats still pretty good for a potential growth share.

stolenscone 11 Dec 2012 , 1:41pm

It's worth bearing in mind that the threat of industrial action has been hanging over the bus division for some time. I hold for the long term, but there are sure to be some bumps along the way.

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