Bill Jamieson: Stagecoach plunge sends red light across economy

Published on Wednesday 3 December 2008 11:19

IF YOU thought this recession would spare "safe", defensive companies, think again.

This morning Scotland-based bus and rail operator Stagecoach warned it was planning job cuts in response to the likely fall in demand on commuter routes.

The company, which operates South West Trains and the Virgin Rail joint venture, said it was reviewing the cost base of its UK rail business, with cuts most likely to be made in support services and administration. It said it was too early to comment on how many jobs might be lost.

Until this morning, Stagecoach had been regarded as a sound, "defensive" share - one of a small group of companies that would pull through this recession relatively intact. So the warning sent an electric shock through the shares.

They plunged 34.5p to 137p - a fall of 20%.

Stagecoach said its rail operations were more susceptible to changes in economic conditions and that it expected to see downward pressure on rail profits in the 2009/10 financial year.

So far the group appears to have been holding up well. Half-year results published today show rail operating profits were 31.7 million, up from 25.3 million a year earlier.

The UK bus division posted an 11.8% increase in half-year revenues to 410.4 million, with operating profits up to 60.9 million from 52.5 million a year earlier.

Overall, group pre-tax profits for the six months to October 31 are up to 105.2 million.

But it's the future that matters.

Chief executive Brian Souter said: "The short to medium term outlook for our UK rail operations is challenging and in anticipation of a further deterioration in economic conditions, we are taking action now to ensure our rail businesses remain competitive."

The rate of growth at South West Trains has slowed as central London employment has been affected by the economic downturn. And looking into next year, unemployment is going to rise very sharply, cutting into revenues from those formerly lucrative commuter train services.

That share reaction might look overdone for now - but prospects for 2009 do not look nearly as robust as had been previously thought.

And evidence of the severity of this downturn grows by the day.

This morning the services sector Purchasing Managers Index showed the pace of decline accelerating in November. The headline services PMI slumped to 40.1 in November, the lowest reading in the series history (started 1996) from 42.4 in October and the seventh consecutive decline. The November reading is 2.3 points down on October (which was 3.6 points down on September). A reading below 50 signifies contraction. The Incoming New Business component plunged to 37.9 in Nov from 40.1 in October - this is also a series low, with many clients reported as postponing decisions.

The Employment component was 43.1, down 2.6 points on October's 45.7, indicating that employment is falling at an accelerating pace.

These are appalling numbers. And they make the case for a minimum full percentage point reduction in interest rates tomorrow compelling.

Says Citigroup economist Michael Saunders, "Given the large size of the services industry in the UK, the message of this survey is particularly gloomy. It reinforces the likelihood of a large cut in interest rates tomorrow - our base case is at least 100bp – with the possibility of more.

And if you're still in any doubt about the severity of what we're up against, a survey from the Nationwide Building Society today shows consumer confidence in Britain hit a new low in November, with almost half of respondents expecting the economy to worsen over the next six months.

Nationwide said its consumer confidence index dropped to 50, down from 56 in October.

Three quarters of respondents believe the economic situation is bad. Some 45 percent expect the situation to be worse six months from now, up from 38% in October; 22% thought it would be better, up five points.

Too gloomy by half? I don't invent it. I only report it.

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