Broker snap: Stagecoach has ticket for rail success

20th Jan 2010 09:02

Stagecoach is most likely to win a new rail contract, says Morgan Stanley (MS), which upgrades the bus and trains firm to 'overweight' from 'equalweight'.'UK Rail will be front and centre again this year, but this time lower employment declines and a restructuring of the franchising system should restore the market's confidence,' the broker told clients this morning.It thinks Stagecoach, which operates the South Western commuter rail franchise, is the best stock to play this theme. The valuation is not demanding at 10.7x 2011 P/E, while there could be 10% upside to consensus earnings per share, driven by cost savings in rail. The price target rises to 205p from 174p.But FirstGroup is cut to 'equalweight' from 'overweight' with target lowered to 430p from 515p. MS has less conviction that the North American student business will return to 4% revenue growth in 2010/11, while there's a 'lack of rationale' for EPS upgrades.Elsewhere, renewed confidence in exposure to UK Rail leads the US broker to prefer Go-Ahead, up to 'equalweight' from 'underweight', over Arriva, downgraded to 'underweight' from 'equalweight'.