For successful stock pickers, 2016 has been a very good year. Three firms that have hugely outperformed the market are BT Group (LSE: BT-A), NEXT (LSE: NXT) and Dart Group (LSE: DTG):
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Company |
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Next |
+15% |
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BT Group |
+18% |
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Dart Group |
+89% |
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FTSE All-Share index |
-4% |
The interesting thing about each of these companies is that this year’s gains have been backed by strong financial performances. These stocks don’t look much more expensive than they did a year ago.
This suggests to me that further gains could be on the cards, if trading remains strong.
BT Group
BT’s strong financial performance has been driven by falling costs and rising profit margins, rather than increased sales.
The telecom giant’s revenue has actually been falling steadily. In 2010, BT reported sales of £20,911m. For the firm’s most recent financial year, which ended in March 2015, sales were just £17,851m.
Earnings are expected to flatten out this year, and I believe that if BT shares are to continue rising, the firm’s sales also need to start rising.
Luckily, this could be on the cards for 2016/17. Analysts are currently forecasting sales of £19,186m for next year, along with a 5% rise in earnings per share, putting the stock on a forecast P/E of 15.
Looking further ahead, BT’s planned acquisition of Orange and T-Mobile owner EE could drive significant long-term growth. BT remains a hold, in my view.
Dart Group
Dart operates the het2 holiday and airline businesses, along with a large logistics firm, Fowler Welch. Of these two, it’s Jet2 that has been driving the majority of Dart’s incredible growth.
Dart’s underlying earnings rose by 29% to 31.7p per share for the year ending in March 2015. Current broker forecasts suggest earnings of 52.1p per share for the current year, giving a modest forecast P/E of just 10.5.
Dart’s balance sheet is very strong, too, with net cash of £263m plus pre-payments from holiday customers of £183m.
However, it’s worth noting that broker forecasts turn more cautious for 2016/17, suggesting that the firm’s earnings per share could fall from 52p to 34p. I’m not sure why this is, but it implies a 2016/17 forecast P/E of 16, which could prompt a modest pull-back of the shares.
I expect we’ll learn more about the outlook for next year in Dart’s March trading statement. Until then, I’d class the shares as a hold.
Next
I recently learned that if you return an item of clothing to a Next store without a receipt, the staff can scan the bar code on its tag and learn when the item was purchased, and how it was paid for.
This kind of thorough and detailed inventory management helps prevent fraud. It is also one of the reasons that the firm is able to provide such accurate and detailed guidance on sales and profits for investors.
Next shares trade on a forecast P/E of 18 for the current year. The shares are above the board’s buyback price limit, so surplus cash is being returned through special dividends instead. Analysts expect this year’s regular and special dividends to total 338p per share. That’s a yield of 4.3% at today’s price.
Next does face potential headwinds from rising interest costs and the national living wage. However, the firm’s 21% operating margin and long-running revenue growth suggest to me that further gains are likely. Next remains a share to buy on the dips, in my view.
