Biking Business and Train Troubles

A discussion of the West Coast debacle, Halfords surprise sales spike and the latest performance at Tesco and Sainsbury

Rodney Hobson 5 October, 2012 | 4:12PM
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Off the Rails

The extraordinary debacle surrounding the awarding of the rail franchise for the West Coast line is the culmination of 20 years in which Conservative, Labour and now Coalition governments have pursued a flawed privatisation policy. The lesson for investors is that the private companies always win and the taxpayer always loses.

All bidders for rail franchises are well aware that they will incur costs, with no guarantee of success. There can be only one winner and the more bidders there are, obviously there are correspondingly more losers.

The rules of bidding are set by the Government and there is no obligation other than common decency to adhere to them. Specifically, it is for the Government to decide whether the claimed value of the bid is believable and it is perfectly legitimate to take one bid in preference to a superficially more attractive rival bid.

All the franchisees dress up their bids with scant regard to whether projected passenger numbers and revenue are achievable - Virgin has done so in the past and has no grounds for complaining that FirstGroup (FGP) has pulled the same stunt this time.

So why on earth was it possible for Virgin to threaten legal action and why did the Government cave in so readily? The Government is entitled to interpret the rules as it sees fit. There is nothing fair about the bidding process, so too bad.

The whole rail privatisation system is biased towards the transport companies. If all goes well, they make profits. If revenue fall short, the Government bails them out. No wonder they are so willing to run up costs in making bids. No wonder they are quite willing to run up millions of pounds in costs.

Investors should bear in mind that when it comes to private companies doing work for Government, all the risks are with the Government and all the profits are with the private companies.

To see my last commentary on the West Coast debacle, read "Trains Derailed & Part-Timer Details".

On the Shelf

I won't labour the comparison that I have made ad nauseam between Tesco (TSCO) and Sainsbury (SBRY). This week's figures show Tesco profits falling by 11.6% in the half year to 25 August, marking the first downturn since 1994.

Sales are down in the UK and it is costing £1 billion to turn them round; the eurozone crisis and restricted opening hours in South Korea are affecting the international side; Tesco's Fresh & Easy in the US is repeating the disaster that Sainsbury suffered in New England with Shaws 20 years ago.

Meanwhile a trading update from Sainsbury showed like-for-like sales up 1.9% in the latest quarter.

Justin King was greeted with low hopes when he took over at Sainsbury. He has produced 31 consecutive quarters of growth. Tesco's new chief executive, Philip Clarke, has yet to prove himself.

Shares in Sainsbury, which form a core holding in my portfolio, have probably risen far enough for now but its yield of around 4.6% still looks attractive. I have not the least desire to sell.

Here, Wiggins

Tie a yellow jersey round the old bike. It seems that the sight of Bradley Wiggins cycling to glory in the Tour de France, followed by a chain of medals for British cyclists at the I hope the Olympic effect really does ride on and on, but I assume that the legacy will wear off fairly quicklyOlympic Games, has brought out budding pedal pushers.

I hope the Olympic effect really does ride on and on, but I assume that the legacy will wear off fairly quickly 

Sales at retailer Halfords Group (HFD) rose by 5.6% on a like-for-like basis over the past three months. This goes against expectations for a fall. Cycling sales were up 14.7%. Halfords shares promptly jumped 37.5p to 303.5p.

I hope the Olympic effect really does ride on and on, but I assume that the legacy will wear off fairly quickly. It is worth noting that Halfords sales fell by the same percentage in the previous quarter, so all it has done is make up lost ground.

The shares fell from 550p in July 2010 to just below 200p this summer. The yield is admittedly still attractive at over 7% but I am concerned that revenue and profits will slide for the second consecutive year and that the dividend may well be reduced.

I feel that the recovery has gone far enough and see the share price rise as an opportunity for longer term investors to cut their losses rather than a chance to pile in.

Halfords is one of the highest-yielding stocks on the FTSE 350. To see a list of other high-yielding FTSE companies, read “Top 20 High-Yielding Stocks”.

Join Me at the London Investor Show

I hope to see as many readers as possible at the upcoming London Investor Show at Olympia, London, on Friday 26 October. To get a free ticket to the show and one seminar, visit www.londoninvestorshow.com and type “Morningstar” into the voucher code.

I shall be giving my usual opening seminar on fundamentals at 10:30AM but I have also just agreed to run an additional session on changes in the regulations governing independent financial advisers. Details will be on the show website soon. This is a vital topic for all those who invest through an IFA.

The rest of the team at Morningstar.co.uk will also be at the event, so be sure to drop by and say hello to them. 

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
FirstGroup PLC166.50 GBX1.28
Halfords Group PLC133.22 GBX-0.13
Sainsbury (J) PLC268.60 GBX-0.59Rating
Tesco PLC367.00 GBX0.16Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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