Should You Buy These Falling Stocks: International Consolidated Airlns Grp SA, Old Mutual plc & AO World PLC?

Are International Consolidated Airlns Grp SA (LON:IAG), Old Mutual plc (LON:OML) and AO World PLC (LON:AO) falling knives or improving bargains?

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Shares in International Consolidated Airlines Group (LSE: IAG), Old Mutual (LSE: OML) and AO World (LSE: AO) have all fallen sharply recently.

Is now the time to pick up a bargain, or could these companies have further to fall?

International Consolidated Airlines

IAG chief executive Willie Walsh has been battling to add Ireland’s Aer Lingus to his company’s portfolio for some time. Mr Walsh is now on the verge of success, having persuaded the board of Aer Lingus to back a cash offer of €2.55 per share for the airline.

On the face of it, the Aer Lingus bid should help IAG benefit from more economies of scale and an improved choice of routes and airport slots. Yet IAG shares have fallen by 20% from the 52-week high of 630p seen in April. Why?

One possible reason is that funding the €1.4bn takeover of Aer Lingus will nearly double IAG’s net debt of €1.7bn. Delivering real returns from this takeover could take a while and is likely to restrict dividend growth in the meantime.

City analysts seem to be cooling on the stock, slightly. Consensus profit forecasts for 2015 have actually fallen slightly over the last month.

In my view, while IAG looks cheap on a forecast P/E of 9, I think there’s a risk that the firm’s profit margins could come under pressure next year. At 500p, I’d rate IAG as a hold.

Old Mutual

Shares in life insurance and asset management firm Old Mutual have fallen by 14% over the last month. There doesn’t seem to be a specific reason for the fall. The firm’s first-quarter trading update was broadly positive, reporting an 18% rise in gross sales and a 10% rise in funds under management, which rose to £351.4bn.

Old Mutual is unusual in that it offers safe, London-based exposure to the fast-growing African market. Sales from the firm’s emerging markets division rose by 20% to £2.7bn during the first quarter, accounting for 38% of total sales.

The shares currently offer a prospective yield of 4.8% and trade on a 2015 forecast P/E of 10.5. These figures look very attractive to me, especially given the potential for strong growth in Africa.

I rate Old Mutual as a buy and believe now could be a good time to top up.

AO World

Sales are vanity, but profit is reality.

Unfortunately for shareholders, the reality is that AO World isn’t really making any money. The firm’s recent results showed that on UK revenue of £470.8m, it made an adjusted operating profit of just £12.7m.

That represents an operating margin of just 2.7%. Factor in losses from the group’s operations in Europe and you’re left with a full-year loss of 0.6p per share.

AO shares are now down by 57% from their all-time high of 336p, and have fallen by 16% since its results were released on 2 June.

Of course, many online retailers lose money until they achieve a certain scale. AO has certainly grown fast.

Indeed, if you take a bullish view, the current share price looks quite reasonable. Consensus forecasts for 2016/17 show AO reporting a net profit of £16.1m, giving a forecast P/E ratio of 36.

The problem is whether the company can deliver on this big promise. I’m not convinced.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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