The stock market throws up some spectacular winners. Indeed, if you manage to alight on one of them, a relatively modest investment can make you a millionaire. For example, if you’d invested £15,000 in Domino’s Pizza when it was floated in 1999, your holding would be worth £1m today.
easyJet (LSE: EZJ) has been another successful business of the 21st century. However, a £15,000 investment at its flotation in 2000 would be worth only £55,000 today. To get to the million, its share price would need to increase more than 18-fold from its current 1,235p. Such an increase would take its market capitalisation from £4.9bn to £88bn and make it the fifth largest company on the FTSE 100, as the index presently stands.
Domino’s has been a millionaire-maker for a relatively modest £15,000 investment. easyJet has been a decent investment but simply not in Domino’s league. To be an easyJet millionaire today, a £273,000 investment would have been required back in 2000. The budget airline remains a reasonable but unspectacular investment proposition, trading on 12.5 times forward earnings with a prospective 3.9% dividend yield, but let me explain why it always lacked the millionaire-maker potential of Domino’s. And, more importantly, why a recent flotation from the easyGroup stable — easyHotel (LSE: EZH) — could be a millionaire-maker.
The table below shows the market capitalisations of easyJet, Domino’s and easyHotel at their IPOs and their revenues and profits in their first annual results as listed companies.
|Market cap (£m)||777||25||50|
As you can see, easyJet was a far more mature business when it came to market than Domino’s and easyHotel. If we’re looking to turn a £15,000 investment into £1m we need to visualise a company whose value can plausibly increase at least 67 times — and likely much more, as few companies grow without issuing shares in further fundraisings and as part of directors’ pay packages.
In the case of easyJet, we would have needed to visualise a market cap of at least £52bn to turn our £15,000 into £1m. That’s rather far-fetched. It was always inherently more plausible that Domino’s could become a £1.7bn company, while easyHotel becoming a £3.4bn company can also be plausibly visualised.
Check-in to easyHotel?
easyHotel released a positive trading update this morning and its shares are up over 5% on the day to 93.5p. The price at flotation in 2014 was 80p and with the company also having issued further shares since (notably in a £38m placing last year), its market cap has risen from the £50m at IPO to £94m today. As a result, if we’re investing at today’s price with a view to turning £15,000 into £1m, we need to visualise a market cap of at least £6.3bn. I’d suggest this remains just about plausible and that easyHotel could be a million-maker stock on a 20-to-30-year view, if share dilution doesn’t run too far ahead of broad equity inflation.
Near-term conventional valuation ratios of 8.5 times 12-month forecast revenue, falling to 4.8 times for 2018/19, aren’t exactly cheap, but with a great brand that could potentially dominate the super budget segment of the hotel industry, it’s a business I’d be happy to risk buying a small slice of.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.