After being hit hard by the coronavirus pandemic, I’m wondering if easyJet (LSE: EZJ), International Consolidated Airlines (LSE: IAG) and Rolls-Royce (LSE: RR) could be the best shares to buy at current prices.
Here, I’ll look at how they’ve coped during a tumultuous 12 months. And, more importantly, where they’re at now and whether they offer investors money-spinning potential.
Survival
As the pandemic unfolded, easyJet, IAG and Rolls-Royce slashed costs, made use of government support measures, and boosted their cash with new borrowing facilities and equity fundraisings. Recently, they’ve trumpeted their improved liquidity and ability to withstand what the directors believe are reasonable downside scenarios.
Unsurprisingly, market sentiment towards the three companies has improved. After all, there were fears they might not even survive at the height of last year’s uncertainty.
Best shares to buy after the spring crash
Brave investors who decided EZJ, IAG and RR were the best shares to buy after the spring crash have done pretty well. From the lows in the weeks immediately following the crash, buyers of EZJ have seen gains of up to 66%. Buyers of IAG, gains of up to 35%. And buyers of RR (who took up their rights in the subsequent rights issue), gains of up to 25%.
Nevertheless, if you look at their share price charts, you’ll see all three are still way below their pre-pandemic levels. On the face of it, they appear to have massive further upside potential.
Big changes
However, it isn’t just the companies’ share prices that have changed from a year ago. For one thing, the number of shares in issue has increased at all three:
- EZJ to 457m from 397m.
- IAG to 5bn from 2bn.
- RR to 8.4bn from 1.9bn.
Debt has also increased:
- EZJ reported net debt of £1.1bn at its 30 September financial year end (versus £0.3bn at 30 September 2019)
- IAG had net debt of £10bn at its 30 September third-quarter end (versus £5.5bn at 30 September 2019)
- RR expects to report net debt of £3.6bn-£4.1bn for its 31 December year end (versus £1bn at 31 December 2019).
With such large changes in the number of shares and levels of debt, a simple share price chart doesn’t tell us much about the value of the company today relative to its value in the past. Enterprise Value (EV) is a useful measure in such situations.
Best shares to buy now?
EV is the theoretical amount you’d have to pay to acquire the whole company on a cash-free and debt-free basis. It’s the company’s market capitalisation, plus debt, minus cash.
If you only ever look at share-price charts, you may be surprised by what EV reveals about the value of EZJ, RR and IAG today, compared with this time last year.
|
|
Current EV (£bn) |
EV 1 year ago (£bn) |
|
EZJ |
4.7 |
6.1 |
|
RR |
12.8* |
14.0 |
|
IAG |
17.8 |
17.5 |
* With 30 December net debt at the midpoint of management’s guidance range
EZJ is the only one of the three companies you could theoretically buy today for a significantly cheaper price (23% discount) than its pre-pandemic value. RR’s discount is a single-digit percentage. And IAG’s EV is now actually higher than it was a year ago.
Are these the best shares to buy today? Based on their EVs, I see IAG as a stock to avoid, RR as one to watch, and only EZJ as buyable.
