There has never been a better time to buy EasyJet plc and International Consolidated Airlns Grp SA

After a recent pullback, EasyJet plc (LON:EZJ) and International Consolidated Airlns Grp SA (LON:IAG) look like bargains.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The airline industry has had a rough time of it during the oil price boom of recent years. But as the commodities supercycle has ended, hydrocarbon prices have tumbled. And this is unequivocally good news for the airlines.

After the EU referendum on 23 June, there were many fears about how the UK economy, and the stock market, would fare. But worries about a recession and a strong negative reaction to the vote have proven unfounded so far. That’s why I think there has never been a better time to buy EasyJet (LSE:EZJ) and International Consolidated Airlines Group (LSE:IAG).

EasyJet

No-frills airline EasyJet operates very much along the lines of a typical low-cost airline, using airports outside of the main hubs such as Heathrow and Gatwick and no free meals on board. In part, this business model was custom-made to survive the years when gasoline prices were high, but I think this firm will continue to progress as a no-frills business, even as oil prices stay low.

Unlike the premium airlines, EasyJet did well even during the commodities boom, but it’s doing even better now that oil prices have tumbled. Turnover has been rising from £4.2bn in 2013 to £4.6bn in 2015. Likewise, earnings per share have climbed from 100p in 2013 to 138p in 2015.

What’s more, I don’t think the recent pullback in the shares is a reason for investor alarm but it has created a buying opportunity. From a high of 1,915p in 2015, the shares are now keenly priced at 1,099p. A trailing P/E ratio of just under 8, and a high and rising dividend yield of 4.1%, show how cheap the shares now are.

International Consolidated Airlines Group

Premium airline IAG, which owns major brands British Airways and Iberia, has taken a completely different path to profitability from EasyJet. During the years of high hydrocarbon prices, and despite a radical restructuring, the firm struggled to turn a profit. IAG uses hubs such as Heathrow and Gatwick, provides free meals, and has reserved seats. This means the overheads are that much higher, and when fuel costs are high, margins become wafer thin.

But reduce fuel costs, and earnings rocket. That’s why, while turnover has gone from £15.5bn in 2013 to £16.8bn in 2015, earnings per share have leapt from 5.4p in 2013 to 51.9p in 2015. That’s a far more rapid rise than EasyJet. So, not surprisingly, the share price has also taken off, going from 150p in 2012 to a high of 617p in 2015.

And as Britain’s economy continues to strengthen, I suspect travellers may start to prefer the premium airlines to the low cost carriers, further boosting IAG’s profitability.

But the crash following the EU vote has taken the shares down to just 390p. That leaves the transport company on a trailing P/E ratio of 8 and a dividend yield of 1.8%. With oil prices set to remain low for the long-term, that looks enticingly cheap.

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.

Prabhat Sakya 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.

More on Investing Articles

Investing Articles

Up 75% in 5 years, I reckon this FTSE 250 still has lots to give!

Our writer explains why this FTSE 250 stock could still continue to provide growth and returns despite already being on…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 high-quality FTSE 250 stocks to consider buying

The FTSE 250 is home to some of the best investment opportunities out there. This Fool highlights two stocks for…

Read more »

Investing Articles

The Marks and Spencer share price dips! Is this my chance to buy?

Marks and Spencer was one of the hottest stocks on the market last year. With its share price falling in…

Read more »

Growth Shares

How low could the boohoo share price go?

Jon Smith explains why the enterprise value and the low risk of bankruptcy should help to prevent the boohoo share…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Down 23% in a year! Can the Diageo share price regain £30 in 2024?

This Fool UK writer is checking the charts to see if the Diageo share price can recover from the recent…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

I wouldn’t touch this FTSE 100 stalwart with a bargepole

Despite looking like a bargain on paper, this Fool is avoiding FTSE 100 constituent Vodafone at all costs. Here he…

Read more »

Investing Articles

I’m waiting for the Rolls-Royce share price to pull back before I buy

The Rolls-Royce share price has been the Footsie's best performer in the last year. But this Fool has no intention…

Read more »

Front view photo of a woman using digital tablet in London
Dividend Shares

2 dividend stocks to take me from £0 to £9.5k in second income

Jon Smith talks through some ideas with second income potential, including one stock that has a dividend yield above 10%…

Read more »