Here’s why the National Express share price is a buy on dip for me

Arrowings ascending on a chalkboard

That travel stocks have had a really hard time clawing their way back up to pre-pandemic levels is no surprise. Even keeping that in mind, when I saw the 25%+ drop in the National Express (LSE: NEX) share price over the past year, I had to write about it!

Why has the National Express share price dipped?

Much of the decline is not hard to understand. The FTSE 250 stock has dropped some 17% over the past month. This means that the drop in the broader markets has impacted investor sentiment on it. As a cyclical stock it can be quite sensitive to such market reactions. Moreover, travel stocks are dependent on fuel prices — key culprits for rising inflation that has also kept stocks in an uncertain place. 

However, there are two other facets to the National Express share price story that are still unexplained. The first is, what explains the rest of the drop? And the second is, why has the share price not picked up despite its encouraging recent results? 

Pandemic and merger hold the FTSE 250 stock back

As far as the first question goes, I think there are plenty of reasons why the share price has dipped. First, the pandemic itself was creating uncertainty till the end of 2021 and travel stocks were of course the first to be impacted. 

Then, National Express and its rival Stagecoach were planning a merger since early last year, which might or might not have worked out. As an investor in the stock, I was myself a bit skeptical about how that might turn out, because many mergers and acquisitions are known to fail. 

After months of negotiations the chapter now appears to have closed after Stagecoach accepted an offer from Germany’s DWS Infrastructure instead. Also, even though the company’s numbers have shown improvements, it is far from a complete recovery, which brings me to the second question.

Improving results

In 2021, National Express saw an 11% increase in revenue compared to last year. It is also free cash flow positive now. Its losses have declined too. Its post-tax losses are down to almost £78m, down from almost £327m last year. 

However, there is enough in its latest outlook to make me optimistic about the stock. It expects its revenue to go back up to almost 2019 levels this year, reflecting full recovery in top-line. It also expects improvements in cash flow.

Its profitability, however, is expected to lag behind revenue recovery, according to its outlook. It does not help that inflation is rising, which could be a squeeze on profits. The mixed picture might be holding its share price back, despite encouraging signs. 

What I’d do

Its own outlook, the waning of the pandemic, and even a potential end to the Stagecoach deal might just be positives for the National Express share price in the foreseeable future.

Rising fuel prices make me cautious, even though like other travel companies, it too is hedged. But we are in a particularly precarious situation as far as commodity prices are concerned so let us see how this situation plays out. It could still continue to be a drag on its price.

I do think, however, this dip is a buying opportunity for my long-term portfolio. I have bought it and might just increase my holdings of it now. 

The post Here’s why the National Express share price is a buy on dip for me appeared first on The Motley Fool UK.

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Manika Premsingh owns National Express Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.