HSBC downgrades Stagecoach, positive on National Express

Analysts at HSBC downgraded their recommendation and lowered their target price on shares of Stagecoach, in light of the company's "high levels" of off-balance sheet debt together with continued concerns around its rail franchise and UK bus operations.

The recommendation was taken down a notch from 'Hold' to 'Reduce' and the target price was cut from 205.0p to 200.0p.

HSBC's specific concerns around Stagecoach are on top of the sector's shared woes of high variability in companies' earnings streams and continued "difficult" trading conditions, with the best opportunities probably to be had overseas.

"In summary, it’s simple: The UK is a difficult market and the best opportunities for operators appear to be abroad. New rail franchises may offer opportunities, but existing ones are a risk," the analysts said.

For UK bus operations, a bottom in earnings downgrades was still not at hand, especially if wage inflation is beginning to take off and if volume weakness spreads to London, they added.

In the same note, HSBC touts National Express given the company' s growth prospects from planned bolt-on acquisitions in the States, limited UK risk and a better outlook than feared for contract changes in Spain.

It therefore raised its target on National Express from 400.0p to 440.0p while staying at a 'Buy'.

Go-Ahead Group was also kept at a 'Buy' on valuation grounds, but its target was nevertheless cut from 2,200.0p to 2,000.0p, while First Group's target price was revised from 130.0p to 145.0p with the recommendation kept at 'Hold'.

As regards the latter, the investment bank said that it "is finally getting to grips with its US turnaround."