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Full steam ahead for this new FTSE 250 growth stock? Here’s why I’m not tempted

Paul Summers
Train travelling through countryside

Newly-listed companies often attract great excitement from investors. Unfortunately, this enthusiasm is more often than not quickly replaced with disappointment when more details about the state of the business emerge. Luxury car maker Aston Martin is an example. 

Since arriving on the market to a huge fanfare last year, the firm’s shares have performed appallingly, due to it selling not nearly enough of its much-lauded cars. The stock changes hands for just 426p a pop as I type — a little over 75% below the price fetched when first listed. 

It’s for this reason, I’ve taken more of an interest in the half-year results of travel platform operator Trainline (LSE: TRN) this morning. The company only came to the market in late June and, aside from a trading update in September, this is the first chance investors have had to see how their new holding is faring. 

Will it buck the IPO trend?

First impressions are good. Net ticket sales jumped 19% to £1.8bn in the six months to the end of August, partly attributed to the rise in the adoption of etickets in the UK (Trainline’s app saw year-on-year download growth of 59%). A rise in customers at its far-smaller international division was also credited. 

The above, combined with additional streams such as advertising and insurance, saw revenue rise 29% to £129m. That said, Trainline still reported a post-tax loss of £89m for the period, largely due to one-off costs incurred from the listing.

Perhaps most importantly, the FTSE 250 member remains positive on its outlook, reiterating it expects net ticket sales percentage growth in the high-teens over the full year (ending 28 February) and group revenue in the low-to-mid-20% range.  

Not bad. So, it’s a ‘buy’?

Well, no company is worth buying at any price and, despite today’s encouraging set of results, this is where the investment case for Trainline breaks down for me.

Before markets opened today, the stock was trading on almost 52 times earnings. That’s very high, even for a company that stands to benefit greatly from more people doing more things with their mobile phones. Indeed, the fact market participants have greeted today’s numbers with a collective shrug suggests a lot of optimism is already priced in. Only through demonstrating its ability to consistently hit/raise profit targets will more people be likely to buy in, I think.

This doesn’t necessarily mean Trainline’s share price is destined to repeat the path of Aston Martin’s. For one thing, the latter’s finances are in a far worse state, evidenced by the fact it’s now required to pay 12% interest on the £120m cash it borrowed a couple of months ago. 

There’s also little doubt demand for Trainline’s services is likely to be more reliable given that rail travel is a necessity for many. By contrast, buying an Aston Martin is something most of us are unlikely to do. For this reason, the former presents as a better pick for defensively-minded investors in spite of the punchy valuation.

All that said, I’m exercising caution. Highly-rated growth stocks tend to be hit hardest when investors get nervous and, with our EU departure still up in the air and speculation of a looming recession, protecting what capital I have rather than chasing profits takes priority right now.

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Paul Summers has no position in any of the shares mentioned. 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.

Motley Fool UK 2019