Transport very attractive with above average yield
The strength of sterling against the euro has caused problems for many companies but one sector tha...
The strength of sterling against the euro has caused problems for many companies but one sector that has been largely immune from the adverse affects of a strong pound is transport.
Companies in the sector obtain most of their earnings domestically so have no exposure to currency risk. Alex Crook, fund manager at Henderson Investors, says the sector should not be classified as old economy.
He adds: "It is not like the engineering sector which was adversely affected by the market favouring new economy over old economy. The sector has recently gone through a bad patch in general which was due to a number of factors. These included bus company acquisitions in the US hitting problems and British Airways losing some of its top management."
For the year to 16 May the FTSE All-Share made gains of 4.7%. In contrast the FTSE Transport index fell by 24%. Hendersons is overweight transport stocks as it sees the sector as generally cheap and offers an above average yield. Crook has exposure to National Express and the British Airports Authority (BAA). He says: "BAA's price has fallen because of the abolition of duty free but the company is heavily regulated with profits kept at stable levels."
Over year the company's shares had a negative total return of 22%. The shares are currently trading on a P/E of 14.5% and offer a dividend yield of 3.85%. At the moment the FTSE All-Share trades on a P/E of 25 times and provides a yield of 3.07%.
One stock which Crook holds that is definitely out of favour is Railtrack. He acknowledges the company has been knocked back by the Government and the Paddington rail crash, but believes it is still good value. Since the start of the year Railtrack's share price has fallen by 13.1% and now trades on a P/E of 13 times. Crook says: "It is undertaking a huge investment programme which will reap rewards for shareholders."
Geoff Miller, manager of Exeter Equity Income unit trust, is also bullish on transport stocks. His favoured company is FirstGroup, which published its final results last week. The company's profits showed a rise of 28% from the previous year and the dividend paid to shareholders increased by 16%. As well as offering a good dividend yield of 3.75%, the share price has a lot of upside potential, according to Miller.
He says "The company has a market cap of £450m, even if shares rise by 75% the price will be still half that a venture capitalist will offer to a company."
Another positive for shareholders is the company has had offers for its holding in Bristol Airport which would be earnings enhancing, according to Miller. The company's earnings per share are 30p. He favours First Group over Stagecoach as the former has had fewer problems with the acquisitions it has made in the US.
Miller also likes P&O and Associated British Ports. He says: "P&O will soon be splitting into two separating the cruise business from the rest of the company. Associated British Ports share price does not reflect its potential. The company owns a lot of land which it can develop itself or sell to developers."
As at close of business on 15 May the share price was 313p. Miller believes the price can rise at least by a further 25%.
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