Sentiment seems to be turning more bullish in the stock market. We’re starting to see investors return to higher-risk stocks like Ryanair (LSE:RYA) and International Consolidated Airlines Group (LSE:IAG). I’m considering buying into the sector as a play on travel returning to normal. I don’t want to buy both stocks, so want to see which offers me better value for my remaining ISA allocation. My Stocks and Shares ISA allows me to hold and trade stocks without incurring capital gains tax. So if either rocket higher and I eventually sell for a profit, I get to keep the full amount.
The case for Ryanair
Ryanair operates at the lower-end of the market. This means it relies more on volume of traffic due to its cheaper prices. During the first half of last year, customer numbers fell 80% from 85.7m to 17.1m. This was a key driver for the share price moving lower over the course of last year. The updates given out by the company have given the market expectations that customer numbers will show a similar fall for the full-year results.
I think this gives a very low hurdle level in 2021 for Ryanair to outperform. For example, even if customer numbers for the next six months fall by 50%, it’s still an improvement from expectations of falling 80%. Any positive news could see the Ryanair share price have a larger than expected bump higher.
The positive surprise factor may be felt more with the Ryanair price than the IAG share price due to the strength of balance sheet. In a recent update, Ryanair commented that it has “one of the strongest balance sheets in the industry”. It had over €4.5bn in cash as of the end of September, with over €400m raised with new equity. So investors like me may be pleasantly surprised going forward when this financial resilience accelerates growth in 2021.
The IAG share price story
On the other hand, IAG may offer me better value right now. It’s trying to increase the strength of balance sheet as well. This has been highlighted recently with the takeover of Air Europa, with the sale price cut by 50% to €500m. Lower outgoings are one way of trying to return to profitability, after am operating loss of €3.2bn for the first nine months of 2020.
Assuming it can stay afloat, IAG could perform better as it has a larger share of business travel than Ryanair. Added to this is the wider range of locations flown to around the world. Ryanair could be hampered with its focus on short-haul flights to Europe. IAG has the benefit of picking up more lucrative long-haul flights via British Airways (even with short-haul Aer Lingus in the group).
From a valuation perspective, the IAG share price also looks more appealing. P/E ratios are skewed given the recent losses, so aren’t helpful. Looking at the enterprise value, IAG trades at a steeper discount to market capitalisation than Ryanair. This could suggest it’s more undervalued right now.
Overall, even with the potential for Ryanair to beat expectations, I think the IAG share price offers me better value.
But I have to remember that both carry risk as no quick recovery is guaranteed. As well as deciding on which share to buy, I also need to take that into account.
