Dart (LSE: DTG), Direct Line (LSE: DLG) and Breedon Aggregates (LSE: BREE) have posted stunning gains so far this year. But will the companies be able to deliver again next year or is it time to sell up?
Dart Group
Dart Group is an aviation services and distribution group, which has doubled sales and quadrupled profits since 2012. Over the same period, the company’s shares have risen a staggering 710%.
Dart has continued to outperform this year. Year to date the company’s shares are up 73% excluding dividends, as the group’s operating performance has continued to improve. According to Dart’s first-half trading update, released last week, pre-tax profit more than doubled in the first half following a very strong summer season.
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Dart said pre-tax profit for the six months to the end of September was £147m, up from £72m as reported a year earlier. Revenue rose to £1bn, from £902m as reported last year.
Unfortunately, City analysts expect Dart’s pre-tax profit to fall by a third next year, indicating that the company’s shares might not have much further to go. Group earnings per share are set to fall 35% next year, and based on the figures for next year Dart is trading at a 2016 P/E of 14.8, which looks expensive considering the company’s contracting earnings. The shares support a dividend yield of 0.7%.
Direct Line
Direct Line has only been a member of the FTSE 100 for 13 months, but over the past year the company’s shares have outperformed the wider FTSE 100 by 35% excluding dividends.
Direct Line’s outperformance has been driven by the company’s strong revenue and profit growth in a tough market. The insurer recently announced that during the three months to September 30, its volume of gross written insurance premiums totalled £844m, compared with £820m in the corresponding quarter.
Moreover, Direct Line guided for a combined operating ratio for 2015 in the range of 92% and 94% for ongoing operations. A ratio below 100% indicates an underwriting profit while a ratio above that level indicates a loss. Direct Line has also hinted that the company could announce a special dividend for investors alongside full-year 2015 results.
As insurance is a relatively stable market, Direct Line should be able to maintain its growth trajectory into next year. So there could be further gains for investors throughout 2016.
Direct Line currently trades at a forward P/E of 13.1. The dividend yield is 4.9%.
Breedon Aggregates
Breedon Aggregates is one of the largest building materials firms in the UK and, as a result, the group effectively controls the highly cyclical UK aggregate and concrete market. Breedon’s shares have surged 38% over the past year as the company benefits from record demand from the UK’s booming construction sector.
Breedon has built its presence through a series of bolt-on acquisitions, the largest of which was the £336m takeover of rival Hope Construction Materials. The enlarged group is expected to have revenues approaching the £600m mark.
City analysts expect Breedon’s earnings per share to jump 42% to 2.3p this year and a further 21% to 2.8p next year. However, these forecasts mean that Breedon is trading at a 2016 P/E of 23.2, and I’m wary of paying such a high valuation for a cyclical business.
