The sky’s the limit for International Consolidated Airlines Group (LSE: IAG). The company reported a 39% jump in third-quarter profits today boosted by strong summer sales and the acquisition of Aer Lingus.
What’s more, the company hiked its outlook for the full-year and now expects to generate operating profits of between €2.25bn and €2.3bn for the full year, excluding any contributions from Aer Lingus. Broken down, BA reported a 35% rise in operating profits to €825m for the quarter and Iberia reported a 23% rise in operating profits to €200m
However, despite the good news, the carrier’s shares are trading lower today. At the time of writing, IAG is off by 4.4% as City analysts have started to recommend that investors take profits after IAG’s stellar run this year.
Maiden dividend
Indeed, in the year-to-date IAG’s shares have outperformed the wider FTSE 100 by 20% including today’s declines, and yesterday the company announced that it is planning to make the first dividend payment in its four-year history. Nevertheless, even a maiden dividend payment doesn’t make up for the fact that the airline business is cyclical, and many are now starting to wonder how much longer the industry’s current level of profitability can continue.
Based on current exchange rates IAG currently trades at a forward P/E of 10.9, which isn’t overly expensive. Still, the lingering question of “how much more upside is left” is a reason for investors to be cautious. The airline industry has a reputation for being extremely unpredictable, and it looks as if investors would rather take the money and run after IAG’s recent gains.
Slowing organic growth
Shares in Pets at Home (LSE: PETS) have fallen as much as 8% in early deals this morning after the company said that “trading in parts of the business has been weaker than expected.” Like-for-like sales growth fell to 1.8% during the first-half of the year, down from growth of 4.2% as reported during the same period a year ago.
However, total revenue growth, which includes contributions from new stores jumped to 6%, led by fee income from joint venture veterinary practices up 20.7% to £18.4m.
Pets at Home is on track to roll out 20-25 new Pets at Home stores, 5 Barkers, 50-55 vet practices and 55-60 new grooming salons before the end of this financial year.
High expectations
Overall, today’s first-half trading statement from Pets at Home is relatively upbeat. The company’s organic revenue is growing steadily, and the opening of new stores will drive growth going forward. City analysts expect the company’s earnings per share to grow by 15% this year and a further 10% for 2017.
Still, Pets at Home is trading at a relatively high valuation of 19.8 times forward earnings, which doesn’t leave much room for manoeuvre if the company misses expectations — just as it has done today.
So, if investors are going to buy into Pets at Home’s growth story, they need to be prepared for volatility along the way.
