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Should You Buy easyJet plc Or International Consolidated Airlines Grp?

easyjet

This week’s update from easyJet (LSE: EZJ) was very encouraging, since it showed that the company is continuing to grow its passenger numbers.

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Indeed, in August easyJet saw a year-on-year rise in passenger numbers of 8.4%. This is slightly better than the 7.7% year-on-year growth delivered in July and shows that the company is moving in the right direction.

Furthermore, the load factor (which is a measure of how full its planes are) also nudged up by 1.4% to 94.2%; again showing that the company is making pleasing progress.

But despite this, shares in easyJet continue to under-perform the FTSE 100. The budget airline has seen its share price fall by 10% in 2014, while the FTSE 100 is up 2% over the same time period. Does this mean that shares in the company are now great value and are worth buying? Or is sector peer, International Consolidated Airlines (LSE: IAG) — owner of British Airways — a better buy?

Growth Potential

When it comes to a track record of growth, easyJet is among the most reliable stocks in the UK index. That’s because it has delivered strong growth in each of the last four years, with the bottom line increasing by an average of 58.5% over the period. Furthermore, the company is due to see its bottom line rise by 12% in both the current year and next year, which confirms its status as an impressive growth play.

On the other hand, IAG’s profitability is far more volatile. The company has made a loss in two of the last five years. Despite this, it is expected to increase earnings by 84% in the current year and by 50% next year. Both of these figures are well ahead of EasyJet’s comparatives and highlight the huge potential on offer at IAG.

Valuation

Both companies trade on hugely attractive price to earnings (P/E) ratios, in part as a result of their share prices falling by 10% (easyJet) and 8% (IAG) since the New Year. For instance, easyJet has a P/E of 12.1, while IAG’s is even lower at 11.7. When combined with their growth prospects, it highlights just how much value is on offer at both companies. EasyJet, for example, has a price to earnings growth (PEG) ratio of 1.9, while IAG’s is just 0.2. Growth at a very reasonable price, indeed.

Looking Ahead

Clearly, both companies appear to be worth investing in right now due to their low valuations and stunning growth prospects. Despite having the lower expected growth rate and higher valuation, though, easyJet could prove to be the better buy. That’s because it has a more reliable earnings growth profile and so, while its results may prove to be less impressive than those of IAG, they could be more reliable over the long term. As such, easyJet could turn out to be the better buy for longer term investors.

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Peter Stephens 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.

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