Wheels on the bus go round and round: Why Thesis thinks National Express is ‘a great turnaround story’

Ryan Paterson, research analyst at Thesis Asset Management, has highlighted why National Express has become a recent success story for UK investors.
Paterson has also picked out two other stocks, Victrex and Ashtead, for investors looking for long-term growth from their portfolio.
National Express
Paterson believes National Express is ‘a great turnaround story’ having faced issues in 2009 surrounding its below industry-average margins and a highly leveraged balance sheet. It has successfully transformed its fortunes and now looks well positioned for the future.
“Although habitually associated with its UK coach and bus business, few appreciate its international reach with roughly two-thirds of earnings now generated overseas,” Paterson said.
The company has enjoyed a good start to the US tourist season (secured an average price increase of nearly 4% across the entire portfolio) and strong passenger growth in Spain and Morocco.
Paterson sees National Express targeting the UK tourist market in 2017.
“Given its growing presence in major European international airports this seems a sensible move, whilst seizing the opportunity to refinance £350 million of bonds whilst market conditions were favourable, achieving significant interest costs savings, looks canny.”
“Its prudent and disciplined approach should ensure it continues to deliver good growth, a strong cash flow and new market opportunities. This we believe is key to delivering attractive and sustainable returns to shareholders.”
Victrex
A FTSE 250 company Paterson sees as giving investors a good opportunity for long-term growth is Victrex, a supplier of high performance polymer solutions.
“The explosion in next-generation mobile devices resulted in a period of exceptional volume growth in its consumer electronics division.
“Whilst we appreciate this is set to slow, we still think there’s much more growth potential to fulfil from product development and a diversified range of markets.”
Paterson notes the company’s portfolio remains well positioned to exploit the structural demand for lightweight and flexible composites (replacing metal) and its focus on product leadership will ensure it continues to proactively invest in the development of next­ generation polymeric solutions.
Paterson sees investment for growth firmly on the agenda, saying “with its recent capital expenditure programme on new capacity now complete and with net cash on the balance sheet, we still believe the shares look attractive. Its high-margin, cash generative and innovative product base suggest it’s a long-term growth story.”
Ashtead
The final stock Paterson highlights is Ashtead, an industrial equipment rental company and a constituent of the FTSE 100.
“Our original proposition for buying Ashtead hasn’t changed, its three drivers of growth; cyclical recovery, shift to rental and market share gains remain in place today,” Paterson said.
“Trump’s election victory has however accelerated the return profile. Market expectations for an elongation of the construction cycle have rapidly been priced-in given the possible $1tn of infrastructure spending.
“On top of this the potential for a reduction in the rate of US corporation tax could provide a significant boost to rental operators’ prospects for free cash flow and earnings per share.
“If we see a reduction in the tax rate it has to pay on its US earnings, it would see a decrease in the deferred liability it owes to the US government equivalent to the proportionate change in the tax rate.
“Aside from these hypothetical scenarios, Ashtead updated the market with another strong set of results which showed a continued improvement in operating margins, hitting a record 49% during the quarter.”