Why I’d still buy International Consolidated Airlns Grp SA after results

International Consolidated Airlns Grp SA (LON:IAG) reported a surge in profits on the back of cheaper fuel and strong passenger demand.

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British Airways owner International Consolidated Airlines Group (LSE: IAG) reported a surge in profits, despite taking a hit from a major IT failure which grounded hundreds of flights from Heathrow and Gatwick over the second May bank holiday weekend.

Cheaper fuel

Operating profit before exceptional items for the six months to 30 June rose by 37% to €975m, on the back of cheaper fuel and strong passenger demand in the second quarter of 2017. Passenger unit revenue, a key measure of performance in the industry, increased by 1.5% in Q2, the first quarterly gain in almost three years. The company said it expects a double-digit percentage improvement in operating profit for the full year.

These figures were achieved in spite of the IT failure at British Airways in May, which cost the company €65m in additional compensation fees and baggage claims, and a €44m hit from adverse foreign exchange movements that was mainly down to sterling’s recent weakness.

Looking ahead though, I’m concerned about growing capacity in the short-haul market. Just this week, Ryanair and easyJet both warned of the risk of a late-summer price war among European budget carriers. Although IAG is somewhat protected by its greater focus on long-haul, the airline is hardly immune to market forces.

Still, IAG seems attractively valued, with shares trading at a forward price-to-earnings ratio of just 6.9, based on analysts’ 2017 forecasts. As such, now may be a great time for value investors to consider the airline group.

Earnings beat

Elsewhere, shares in specialist engineering group IMI (LSE: IMI) fell by as much as 4% on Friday after the company announced its interim results.

Although statutory pre-tax profits jumped by 26% to £89m in the six months to 30 June, beating analysts’ estimates, CEO Mark Selway warned about challenging market conditions ahead.

“In the remainder of the year, organic revenue is still expected to be below last year, principally driven by order phasing in Critical Engineering. However, second half margins will show a modest improvement compared with the same period in 2016, supported by both rationalisation savings and improved market conditions in Precision Engineering. Based on current market conditions, we expect full-year 2017 results will be modestly above current market expectations,” he said in today’s announcement.

Revenue was also 11% higher at £848m, while adjusted earnings per share rose by 16% to 28.4p, as its first-half figures were given a big boost by the sterling’s weakness. Excluding currency effects, IMI’s revenue in the first half would have been broadly flat — although that would still have been better-than-expected given the slowdown in capital spending in the energy sector, which has affected sales of its fluid control systems.

Reassuringly though, IMI raised its interim dividend by 1.4% to 14.2p, which indicates management’s confidence in future earnings. The shares currently yield 3%, with a payout ratio of less than two-thirds of earnings.

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended IMI. 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.

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