Stock markets may be close to record highs, but I believe there are still attractive buying opportunities in a number of sectors.
Today I’m going to look at two stocks that could worth considering if you’re aiming to build a long-term income portfolio.
Flying high
British Airways and Iberia owner International Consolidated Airlines Group (LSE: IAG) has outperformed expectations in recent years, as demand for air travel has surged. IAG’s earnings per share have risen by an average of 24% per year since 2011, thanks to a mixture of acquisitions and strong organic growth.
Although IAG’s operating profit margin has risen from 2.8%in 2013 to 11% in 2016, investors have been reluctant to price the shares on a growth valuation. One reason for this is that the business model for traditional full-service airlines is still seen as being under threat from budget airlines.
The contrast is clear in terms of valuation — IAG trades on a forecast P/E of about 7, compared to an equivalent figure of 13 for Ryanair and 16 for easyJet. If trading remains stable and IAG is eventually rewarded with a higher valuation, the firm’s shares could rise strongly.
What could go wrong?
One risk is that the passenger growth may slow. Another risk is that costs will rise faster than ticket prices, putting pressure on airline profit margins. Higher fuel costs are one obvious risk, while sales of profitable premium class tickets usually slow during recessions.
So far, there’s no sign of any problems. Passenger traffic rose by 6.1% in December, and premium traffic was 3.9% higher than in the previous year.
IAG’s third-quarter trading statement showed that operating profit rose by 11.2% to €2.4bn during the first nine months of last year, driving a 21% increase in adjusted earnings per share.
Analysts expect profit growth to slow in 2018, but with the stock trading on a P/E of 7 with a prospective yield of 4.1%, I believe the shares remain worth considering for long-term buyers.
Slow burner with big potential?
Luxury fashion brand Burberry (LSE: BRBY) is going through a turnaround phase at the moment, following the arrival of new chief executive Marco Gobbetti. The company’s plan is to protect and enhance the strength of its upmarket brand by adding new ranges, and restricting the supply of goods through non-luxury channels.
As a result of the investment needed to make these changes, Mr Gobbetti expects to report broadly flat revenue over the next couple of years, before delivering higher sales and profit margins from 2020/21 onwards.
This may seem a long time to wait, but Burberry’s operating margin of 14% and the group’s £650m net cash balance should provide a strong starting point. I also expect these strong foundations to provide good support for the group’s dividend, which currently yields 2.5%.
One further attraction is the group’s international reach, which provides attractive exposure to growing Asian markets.
Why I’d buy
Burberry’s balance sheet remains very strong. And the group’s high margins mean that even a modest increase in sales could deliver a sizeable increase in profits.
Although the stock’s forecast P/E of 19 isn’t obviously cheap, I believe these shares could be worth significantly more in a few years’ time.
