Stagecoach slumps on HSBC downgrade

Transport operator Stagecoach was under pressure after HSBC downgraded the stock to ‘reduce’ from ‘hold’ and cut the price target to 240p from 295p, noting the third quarter trading update showed up potential weakness in the East Coast franchise.

HSBC said the update was generally weak, with a particular slowdown in the rail business.

“The weakness is across its rail portfolio, which appears to be suffering from changes to passengers’ travel patterns. And the part that we worry about most is the East Coast, a franchise that was won on aggressive terms and we think that, just one year in, Stagecoach is already falling behind its targets.”

HSBC pointed out that growth is currently running at around 4% versus the bank’s target of 8%.

The update also revealed continued weakness elsewhere in the company, with more downgrades to bus guidance.

“Management blames the weather, though we suspect that issues such as low fuel prices, changes in shopping habits and town centre congestion are not helping,” HSBC said.

The bank said the stock has clearly fallen sharply – down 25% since the first half results in December – and it is possible to argue a long-term value case for Stagecoach.

However, HSBC reckons the weakness in the shares so far has been mainly due to the bus downgrades, rather than rail risks.

“With a new set of risks potentially set to crystallise, there could be further to go.”

At 1550 GMT, Stagecoach shares were down 5% to 259.70p.