Share Watch: why I don’t regret hanging on to these two shares

Richard Beddard reviews prospects for two Share Sleuth stalwarts.

As luck would have it, two of the Share Sleuth portfolio’s best performers, Games Workshop and Dart, have published their annual reports recently. To find out more about how they have helped the portfolio beat the market, see Share Sleuth. Here in Share Watch we will consider their merits as investments now.

Neither company disappointed shareholders.

Games Workshop 

Games Workshop earned 17% more revenue and 9% more profit in the year to June 2019 than the previous year – modest growth by recent standards.

Going back a bit further, the company’s revenue was 117% higher than it was just three years ago. Its profit was 382% higher. The high rates of growth experienced in 2018 and 2017 were never going to be sustained, but it is a relief that the company is still growing and that its newly elevated profitability (return on capital) is persisting.

Nothing fundamental has changed about the business. It still makes fantasy models and wargames known as Warhammer and Warhammer 40,000. It still makes most of its money selling models through its own stores, independent retailers and its website. Since Games Workshop owns the rights to Warhammer characters and stories, there are no direct competitors for a hobby that delights tens of thousands of people.

But much has changed about the way Games Workshop goes about its business. It has simplified and relaunched the game systems, become much more savvy about helping, instructing and marketing to customers on the internet, slimmed down the stores to a predominantly one-person format, and made it easier to start modelling and gaming by selling keenly priced starter packs. It is preparing to make a TV series.

The only thing standing between Games Workshop and a perfect score of 10 out of 10 is its valuation. The shares cost 22 times adjusted profit in 2019, so they are not obviously cheap at £44.32. Games Workshop’s score of 7.3 is a good one, but not sufficient to make it into my top five ranked shares.

Dart

On the other hand, Dart has burst into the top five. The company earns almost all of its profit from leisure airline Jet2 and its package tour operator Jet2holidays. In little more than a decade, the tour operator has gone from zero to a business turning over £2 billion, second only to Tui in terms of how many passengers it is licensed to fly, and earning Jet2 more revenue and profit than scheduled flights to the same holiday locations.

Jet2holidays also flies all passengers on its own planes, unlike rivals who also use charter and scheduled flights. This gives Jet2 control of the journey, allowing it to tailor its service to the needs of families, a strategy that has won it many accolades.

As with Games Workshop, Dart has developed a unique business, although it is more evidently at risk from competition from online travel agents and other low-cost airlines. Further, should the pervading unease about the direction of the economy be justified by recession, demand for package holidays will surely fall, and while the UK and the EU seem to be serious about keeping planes flying after Brexit, Brexit too is a worry. These concerns probably explain why the shares are so cheap at 750p (10 times adjusted profit).

Although Dart is for contrarians, it scores 7.9.

I have reviewed two other shares this month, both just failing to make it into the top five. Cohort scores 7.7 and Castings scores 7.0 out of 10. I believe all four shares merit the attention of long-term investors, and you can read more about them by following the links to our sister site, interactive investor.

Share Watch favourite five

Score Name Description Interactive Investor link
9.5 XP Power Manufactures power adapters for industrial and healthcare equipment http://bit.ly/swXPP2019
8.4 Victrex Manufactures PEEK, a tough, light and easy to manipulate polymer http://bit.ly/swVCT2019
8 Howden Joinery Supplies kitchens to small builders http://bit.ly/swHWDN2019
7.9 Dart Flies holidaymakers to Europe. Trucks fruit and veg around the UK http://bit.ly/swDTG2019
7.8 Judges Scientific Buys and operates small scientific instrument manufacturers http://bit.ly/swJDG2019

Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value.

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