Dart still flying

In practice:

A bump in the night

Not one, but two charts grace today’s blog on Dart (DTG). The short-term price line describes a curious hump this summer. A 20% run-up in price coincided with the announcement of the company’s full year results on 30 July, and an announcement from a different company, Ryanair, sent the price tumbling back down again on 11 August.

Ryanair, which seems to have pinched British Airway’s slogan, ‘The World’s favourite airline’, is opening its 34th base at Leeds Bradford airport, Jet2.com’s home. Since Jet2.com, a low-cost airline based in six northern airports, is Dart’s principal business,investors probably fear competition.

Obviously there will be some, but I doubt this news is a challenge to the viability or long-term profitability of Jet2.com. Ryanair’s move into Leeds Bradford is probably no more significant than its move out of Manchester, where Jet2.com is adding routes. Low cost airlines seem to be flexible, opening and closing routes to meet demand or cut costs. Just as gamers move tokens around a board, you can’t tell the outcome from a single move.

For me, the results were more significant, because they described a consistently profitable airline in rude financial health. Last year, the company paid off its long-term debt, filled more of its planes (by flying fewer of them), and more accommodation, car hire, insurance, and new ‘extras’ we might once have taken for granted, like hold baggage, online seat assignment and leg room.

The results contrasted with the previous year when profits fell, as the company expanded but costs increased faster than sales.

Three quarters of sales and a bigger proportion of profits come from aviation, which includes Jet2.com, it’s two and-a-half year old package holiday company Jet2holidays.com, its charter business serving other tour operators, and freight. Dart juggles these services to maximise the use of its 30 planes, leasing more if it needs them.

It also owns Fowler Welch-Coolchain, a network of lorries, containers and warehouses that distributes prepared meats, ready meals, fruit juice and pasta aggregated into specific temperature groups. Last year turnover and profit fell as it lost customers to competitors, but the company says it has replaced the lost business and is seeking to grow Fowler Welch by acquisition too.

Dart’s F_Score, calculated from its last two annual reports, is a heroic eight out of nine, and it’s ten year price earnings ratio is nine, so judging by the numbers, it’s both financially strong and cheap.

Lack of debt is a necessity, though, as most of Dart’s finance comes from deferred income, presumably flights people have paid for but have yet to take.

It’s not a reliable source of finance in a recession though, because demand for flights is very sensitive to peoples’ incomes. If incomes fall, we fly less, and if we fly less airlines must find the money elsewhere, either from the bank or shareholders, or by reducing costs. Already indebted airlines may not be able to borrow more, or sell their planes, which explains why so many go bust in hard times.

This is why I think gearing, which usually includes only debt, is often an inadequate measure of a company’s financial position. Benjamin Graham proposed a much broader definition. That a company is financially sound if its total liabilities are less than half its assets, if it owns more than twice what it owes. Although Dart’s gearing is zero, and by that measure it owes nothing, it’s liabilities, including deferred income, are 68% of its assets, way over half.

I’m not as strict as Graham, partly because the F_Score is my main criteria for financial strength and because insisting that liabilities are less than 50% of assets would rule out many modern and successful companies. Dart is in good company. Easyjet’s liabilities are 72% of its assets and so are Tesco’s.

Chairman and chief executive Philip Meeson started Dart when he took over a Channel Island flower distributor in 1983. Judging by a very public ticking-off he gave staff at Manchester Airport, he’s either passionate about his customers, or a nutter who could run Michael O’Leary close in a ranting contest.

Probably a bit of both, which seems to be a requirement in the airline industry.

Meeson owns almost 40% of Dart. It doesn’t give him complete control, and it’s counterbalanced to a degree because 35% is owned by a handful of City institutions, but he’s a powerful figure who seems to be doing a good job.

Good enough, I think, to add Dart to the Thrifty 30 model portfolio at Friday’s close of 54p.

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This is how the Thrifty 30 portfolio looks now I’ve added Dart:

Notes:

• The first transaction in the portfolio was on 9 September 2009
• Cost includes £10 broker fee and £5 stamp duty
• Cash earns no interest
• Dividends and sale proceeds are credited to the cash balance

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In theory:

Why airlines are bad investments

Saj Karsan explains why airlines are bad value investments. Demand for flights is very sensitive to changes in income yet airlines must still pay aircraft leases or debt repayments.

Gregory Seicher discovers value investor Donald Yacktman, who invests in businesses as he would in bonds, by considering the rate of return they earn and the quality of the companies.