In this article I’ll take a closer look at Dart Group (LSE: DTG), ARM Holdings (LSE: ARM) and Rio Tinto (LSE: RIO) and explain why each stock could still be a buy, despite recent gains.
Dart Group
Shares in package travel, airline and haulage group Dart have risen by 129% over the last year. This morning, the firm’s share price edged higher still, after Dart said that full-year profits are likely to “materially exceed current market expectations”.
The firm has had a bumper summer holiday season and expects a strong result from the winter season. The number of customers taking a Jet2 holiday rose by 21% to 936,000 this summer, while the average load factor on the firm’s airline, Jet2.com, hit a new record average of 94.1%.
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While that might mean cramped conditions for passengers, it’s great for shareholders. Dart’s statement that profits are likely to “materially” exceed expectations suggests to me that current forecasts could be upgraded by around 10%. If so, that leaves Dart shares trading on a 2015/16 forecast P/E of just 10.7, which looks like good value, if it’s sustainable.
It’s too soon to say how next year will pan out, but in my view Dart continues to deserve a buy rating.
ARM Holdings
Unlike many tech stars, chip designer ARM has delivered consistent profit growth over many years. ARM’s earnings per share have risen by an average of 42% per year since 2009, and the firm has net cash of £725m — equivalent to 75% of this year’s forecast sales.
Despite this, ARM’s share price has fallen by around 20% since March. Trading at around 945p, ARM now sits on a 2015 forecast P/E of 31, falling to 26 in 2016.
That doesn’t seem overly expensive to me, given ARM’s 40% operating margin and its 85%+ share of the smartphone and tablet market.
The question is where new growth will come from. The company’s big hope is that it will break Intel’s near monopoly of the server market. If it does, earnings could explode. If not, then ARM should be able to continue to deliver incremental growth.
In either case, I believe ARM remains a buy at less than 1,000p.
Rio Tinto
Iron ore giant Rio Tinto is a stock I hold in my long-term income portfolio. The firm’s plunging share price may have scared off some investors in recent weeks, but I was happy to look away and ignore the volatility. Indeed, if I’d had the cash to spare, I’d have happily bought some more Rio shares.
The reason why I am so confident is that Rio’s giant iron ore mines in Australia are bigger and have lower costs than almost any other producer in the world. Even with iron ore prices at multi-year lows of around $50 per tonne, Rio is still highly profitable, thanks to cash costs of around $16 per tonne.
In addition, the global copper market will eventually rebalance and rebound. At this point, profits from Rio’s large copper division could rise sharply. In the meantime, I’m happy to sit back and collect the firm’s 6% forecast dividend yield.
Rio remains a strong buy despite this week’s 10% gain, in my view.
