Over the past decade, shares in travel group Dart (LSE: DTG) have carved out one of the most impressive performances of any stock in London. Since the beginning of September 2009, shares in the business has produced a compound annual return of just under 31%. That’s enough to turn every £1,000 invested into £21,341!
The question I want to answer today is, can the company repeat this performance over the next 10 years?
Growing the business
The root of Dart’s performance over the past decade can be traced to the underlying performance of its holiday business. At the time of the financial crisis, Dart’s leisure business was relatively small. Instead, the group’s primary line of business was distribution and logistics.
Management’s decision to grow out its travel and airline operations have transformed the enterprise. From revenues of £1bn in 2014 and net income of £36m, sales and profits have jumped to £3.1bn and £146m, respectively, for fiscal 2019.
The City is expecting Dart’s growth to take a breather in fiscal 2020. While revenue is expected to hit £3.5bn, profits will take a hit, analysts believe, as higher costs bite. They’ve pencilled in a decline in earnings of 15% for the current financial year.
In a trading update ahead of its AGM later today, management seems to have confirmed this forecast. Commenting on current trading, it said: “With still some way to go in the leisure travel winter booking cycle, the board remains optimistic that current market expectations for group profit before foreign exchange revaluations and taxation for the year ending 31 March 2020 will be met.“
The travel and leisure business can be quite volatile, and this isn’t the first time Dart has had to deal with falling earnings. They fell 14% in fiscal 2017 before rebounding by nearly 40% in fiscal 2018. Based on this, I’m optimistic the company can make a strong recovery from this year’s set back.
Undervalued
But what about valuation? Well, at the time of writing, the stock is trading at a forward P/E of 9. In my mind, that’s a bit under what I’d be prepared to pay for this business. Other low-cost airline stocks are changing hands for multiples in the low- to mid-teens range. With that being the case, I’m optimistic the stock offers excellent value at current levels.
That said, I think it’s unlikely Dart can repeat its performance of the past decade over the next 10 years. The law of large numbers is holding the company back. As I noted above back in 2014, Dart’s sales totalled £1.1bn. They’ve since grown at a compound annual rate of 23% to £3.1bn. If sales were to grow at this rate for the next decade, its topline would hit £30bn by 2030, according to my calculations, making the enterprise bigger than British Airways parent IAG!
However, I’m optimistic Dart’s earnings will continue to grow as the group improves its offering and expands its fleet. As a result, I believe it’s highly likely the stock will continue to produce attractive returns for investors for the foreseeable future.