Services sector: Looking grim

Grainne Gilmore

We will not find out how sharply the economy has slowed down since October until early next year when the official figures are released. But all the signs are that the economy is struggling. Today's survey on the services sector is key as services account for nearly two thirds of total economic activity. And the news from this two thirds of the economy is grim. Activity fell to a record low, and there is no sign of a pick up any time soon as businesses reported that new business and their backlog of existing work is also at record lows.

Companies are also being forced to cut their prices to try and entice new customers, further damaging their bottom line.

This, coupled with record drops in construction and manufacturing activity, which together account for about 20 per cent of the economy, indicates that the recession is set to be deeper, and possibly longer, than has been anticipated.

All eyes are now on the Bank of England to cut rates to try and lift the gloom pervading every corner of the economy.

Stagecoach: Off track

Nick Hasell

Just three months after it pulled into the FTSE 100, Stagecoach Group, the bus and train operator, is set to reverse out again.

That much was evident from today’s 20 per cent fall in its shares, which cut its stockmarket value to less than £1 billion. The severity of that slide makes ejection from the index in next week’s quarterly review an inevitability.

The cause was the disclosure that revenue growth at its South Western train franchise, its key commuter business, continues to slow. Given the operational gearing of rail companies - a high level of fixed costs means that changes in revenues have a disproportionate effect on the bottom line - next year’s profit forecasts were slashed by to 20 per cent.

It is reasonable to assume that the full impact of City job losses have yet to feed through to ticket sales. Furthermore, the peak period for season ticket renewals is just beginning, meaning the company can so far have little clarity on sales.

Stagecoach’s UK and North American bus operations should remain resilient, and given a longer-term “modal shift” away from rail, are proving encouragingly contra-cyclical. At 140p the shares also offer a solid 4.4 per cent dividend yield, with the payout more than three times covered by forecast earnings.

At 7 times next year’s earnings, the shares might appear attractive. But given the capacity for rising unemployment to send Stagecoach off the rails, the shares are still best avoided.

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