Shares in British Airways owner IAG (LSE: IAG) are up by around 3% today after a positive update. Notably, the company has upgraded its operating margin and sustainable return on invested capital targets, and is also now targeting a higher level of free cash flow over the medium term.
In fact, IAG is now anticipating an operating margin of between 12% and 15% (rising from previous guidance of 10% to 14%), while sustainable return on invested capital is due to reach 15%, up from a previous target of 12%.
In addition to increased guidance, IAG also reported upbeat passenger statistics for October, with a rise of 17% over October 2014. Furthermore, the company’s load factor (the proportion of total seats filled) increased by 2.4 points to 83.4%, compared with 81.9% October last year.
Clearly, IAG is moving in the right direction and, looking ahead, the company is forecast to increase its earnings by 75% in the current year, followed by a further rise of 28% next year. Despite such strong growth, IAG trades on a price to earnings (P/E) ratio of just 11.4, which indicates that there is considerable upside potential over the medium to long term.
Similarly, house builder Bellway (LSE: BWY) appears to be undervalued, given the bright future prospects for the sector. Clearly, there is a fundamental supply/demand imbalance within the UK property market and, even if house prices do not rise at the same pace of recent years, the volume of houses sold is likely to remain buoyant — especially since the Bank of England continues to kick interest rate rises into touch.
So, with Bellway trading on a P/E ratio of just 9.7, it appears to offer huge upward re-rating potential as well as a wide margin of safety. And, with its earnings due to rise by 15% in the current year, there is a clear catalyst to boost investor sentiment. Additionally, with Bellway currently yielding 3.4%, despite paying out only 33% of profit as a dividend, it appears to be a very enticing long term income play.
Meanwhile, Quindell (LSE: QPP) recently updated the market regarding the payment of the funds received for the sale of its professional services division. The company now intends to pay them in two separate transactions, the first of which is expected to be 90p per share in December and the second is due to be 10p per share in late 2016 (both subject to court approval).
While this is later than previously expected, the real challenge for Quindell is turning its loss-making business around. In the first half of this year it made a net loss of £33m, which is worse than the first half of 2014 when it made a loss of £29m. As the company stated in its interim results, it faces reputational damage, and while its insurance technology business has potential, it’s likely to take time to develop the right strategy under a new management team.
Certainly, Quindell has the potential to turn its fortunes around in the long run but, at the present time, the likes of IAG and Bellway appear to be far more appealing purchases since they offer relative stability, great value and re-rating potential.
