National Express share price: is it worth it?

The travel sector continues to suffer, with stocks struggling to recover after the worst phase of the Covid-19 pandemic. One struggling stock is undoubtedly National Express. CVC’s recent exit from a takeover bid forced the British transport company to do major fundraising and announce a slower-than-expected profit recovery.

The stock's terrible market performance over the past year has prompted many investors to ask themselves why National Express's share price has crashed. The decline has provoked mixed opinions about the company's future. The macroeconomic environment is not at its best and the company's prospects look increasingly unclear.

National Express is a rail, bus and coach group operating in the UK, Spain, the US and Morocco. It employs over 44,500 people, with the UK bus business at 85% of its pre-pandemic level and investing heavily in fleet sustainability.

Since the beginning of 2022, the share price of National Express (LSE:NEX) has been volatile and the latest price collapse started in June with the stock losing 27.6%. At the time of writing the company's share price is still trending down and sitting at around the 190p mark - a far cry from pre-Covid’s 450p or the all-time high of 657p in 2007.

Again at the time of writing, the transport group currently has a market capitalisation of around £1.233 billion, with a net profit of £68.8 million and revenues of £2.744 billion, against a £1.267 billion debt. It has a P/E ratio of 14.9x, with an expected return on shares of around 3.77%.

There are several reasons for the fall in National Express' share price. Firstly, the group announced that its revenue recovery would be slower than initially estimated. Similarly, its profit recovery will also be slower than expected, based on the company's prospects over the next five years.

This means, profit margins will be lower than had been hoped, and this is what’s caused the stock to suffer such a significant losses on the stock market. It’s clear that investor sentiment is not particularly positive at the moment, with increased distrust in National Express' ability to grow at a sustained pace.

National Express is a cyclical stock, exposed to the economic cycle’s phases. It’s also impacted by the sharp rise in fuel and energy prices that are penalising transport companies in particular. Rising inflation could mean a further reduction in the company's profits too, compounding its woes.

According to the latest information published by National Express, the group aims to strengthen its position and achieve stable growth in the coming years. Specifically, the company wants to achieve at least £1 billion in additional revenue by 2027, with an average profit margin of around 9% in the 2022/27 period.

The group indicates how short-term performance will be linked to two main factors, wage increases that are outpacing cost inflation in the US and demand recovery in the UK. In the short term, the company expects lower margins and rising costs due to the decarbonisation of the fleet, while from 2023 margins should improve and gradually increase until 2027.

National Express’ priority investments are opportunities that offer a high return on investment, deleveraging the balance sheet towards the 1.5-2x target and offering increasing returns to shareholders. The group also wants to reinstate the dividend after the halt that occurred with the Covid-19 pandemic, to be able to offer this benefit again to all shareholders.

As for the short- and medium-term outlook, National Express' performance remains quite uncertain, with numerous risk factors related to inflation, the recovery of the transport sector and raw material price trends. Prospects are more positive for the long term, especially taking into account the willingness to return to paying a dividend to increase profitability for shareholders.