Dart Group – When to sell / Skill & Luck in investing

Today, Dart Group issued preliminary 2012/2013 figures which were excellent.

The stock price jumped another 10%, making Dart my first triple in the 2.5 year history of the blog portfolio:

For me, two questions are now interesting:

1) Should I sell ?
2) Was this skill, luck or both ?

Re 1)

The nice thing about the blog is that you can always go back and look what you have written back then.

Dart was actually the first tangible result of my “Boss Score “model back in June last year. Additionally, at that point in time, the stock was very cheap by any standards.

That’s what i wrote about valuation:

Valuation

A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.

Looking back, under my metrics, Dart increased equity by 8% in 2011/12 and 18% for 2012/13, on average 13%. So slightly below my expectations but still very good. However the share price has shot way beyond my expectations.

Compared to back then, Dart now looks quite expensive as this table shows:

at purchase now Easyjet Ryanair Vueling
P/E: 4.7 11.0 24.6 18.3 11
P/B: 0.6 0.6 1.8 3.33 3.2 1.17
P/S: 0.1 0.1 0.4 1.4 2.1 0.2
Div. Yield 2% 0.87% 1.70% n.a. n.a.
Market Cap 97 mn 348 5558 10290 275
Debt/Assets 2% 1.70% 22.30% 39% 4.50%
EV/EBITDA 0.02 1.8 10.2 8.2

I have included some other discount carriers in the table. Compared to Easyjet and Ryanair, Dart looks rather cheap, but honestly I do not really understand why Ryanair and Easyjet trade so high. Vueling from Spain in comparison does look cheaper than Dart on that basis.

All in all, Dart performed according to my expectations, but the multiple expansion was clearly above expectations.

Personally, I don’t believe that a business like Dart will trade at 2 times book in the long run, nevertheless, momentum and comparable valuations could carry the stock even higher.

As a compromise, I will sell half of my position as of today.

2) Skill or luck

A second question one should always ask oneself: Was this just luck or was some skill involved.

With Dart, I actually try to improve my process compared to the past. I looked quite deeply for instance into fuel hedging as well as into the business model.

That is what i wrote in the first post about the business model:

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.

Actually, part of that competitive advantage, the Royal Mail contract got lost earlier that year and they earn lower margins. What I clearly didn’t see was the fact that Dart could compensate this by growing quite significantly with their packaged tours. This was luck.

Secondly, the stock got a lot of tailwind by the very good performance eof Ryanair and Easyjet. Over the last 12 months, Ryanair gained 84% and Easyjet 147%. Compared to that, Dart’s 192% look good but not totally out of line. That was luck too.

So overall I would say my dart investment was maybe 50% skill and 50% luck. Clearly, my boss model and the research helped to identify a stock which was undervalued. However the timing and the extent of the share price increase and multiple expansion are more luck than anything else.

3 comments

  • I think the “skill” was in picking a stock that had very little downside. The “luck” was that the stock was in a sector that experienced multiple expansion.

    Good job.

  • Ich gratuliere! 🙂 Certainly a nice validation of your BOSS approach.

    DTG was also posted on valueinvestorsclub.com back in 2010; in retrospect it’s hard for me to see why it remained so cheap for so long. It just goes to show, a “smoking gun” reason like forced selling isn’t always necessary for severe mispricing.

    About timing when to sell, I have yet to come up with a boring or simple formula.. but it can be useful to consider from a portfolio perspective how much after-tax cash you receive following the sale, and whether you can reinvest the remaining proceeds in a much cheaper alternative to compensate for the tax bite.

    As you know the cash balance is partly customer prepayment rather than true distributable “excess cash” making EV/EBIT appear low, but the ability to self-finance like this is an attractive feature in itself that will increase long term ROIC – one might even say a Buffett-like “float” that could continue to make DTG an attractive long term holding.

    • the problem with Dart is that the barriers to entry are relatively low and the large players do have ecomies of scale at some point in time. The float thugh is attractive, as long as the buiness is not shrinking.

      mmi

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