Jupiter is positive on transport-ation favouring stocks in the bus and rail sub sectors due to their...
Jupiter is positive on transport-ation favouring stocks in the bus and rail sub sectors due to their relatively attractive valuations.
Kenneth Warnock, manager of the Jupiter Enhanced Income investment trust, says: "Due to low ratings, predictable earning streams and the consolidation that is happening, the transport sector is our main area of focus."
Jupiter holds First Group and Arriva, because Warnock considers them relatively cheap with well-respected management, good franchises and increasing M&A activity. He believes the Government's initiative to increase the use of public transport will have a positive long-term effect but will not lead to anything exciting.
Jupiter does not favour Stagecoach as it has suffered from severe profit downgrades, experienced a problematic acquisition of Coach USA and has issues within its management. Warnock is equally dismissive of Railtrack, stating that it is highly unpredictable due to large construction projects, which are uncertain.
Mark Barnett, UK fund manager at Perpetual, disagrees. He believes a recent report by the rail regulator indicates a willingness to allow for returns on investment. Once this happens, Barnett sees Railtrack as the ideal candidate for the proposed Government rail network.
Jupiter and Perpetual both like and hold a number of port operators, such as AB Ports and Mersey Docks and Harbour. Warnock is attracted to these because he says they have a stable revenue stream and are protected from competition. There is also speculation of port takeovers from financial buyers. There is a pull towards logistic companies, such as Christian Salveson and TDG, as they are also involved in a fair amount of M&A activity, he says.
Warnock adds: "As Europe deregulates there are a number of pan-European logistic groups being driven by e-commerce. Additionally, as companies realise that delivery is a non-core activity, there is a trend towards outsourcing, and companies are turning to specialists."
Mike Felton, director of pan-European Equities at Royal & SunAlliance, feels there is no strong sector leadership in the market as a whole and that opportunity lies in stockpicking.
Felton thinks the sector is difficult to view due to its heterogeneous nature. But since the technology correction in March there is an attraction to defensive stocks, such as airport authority BAA, which is tied into a long-term growth industry. He notes that bus companies have had a decent bounce and are still relatively cheap, but also points out that the growth outlook is not that exciting. He adds: "Due to the Government's determination to up the use of public transport, investment may increase and benefit the bus companies. It is not going to make a huge difference but it will be helpful at the margin."
Felton also favours stocks such as Exel, the result of a merger between Ocean and NSC. He regards it as a "good quality, well managed company in a fast growing market". Royal & SunAlliance is cutting back its large position in Arriva, the bus operator, and feels positive on BAA for its defensive merit.
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