2 dirt-cheap high flyers

Not every stock in the top tier is expensive. Paul Summers looks at two potential bargains.

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The performance of markets over the past year has made it increasingly difficult for value-focused investors to find bargains. That said, even the top tier contains a few companies that still trade at decent valuations. Here are just two examples that I think could be solid buys, despite their cyclical characteristics.

Soaring profits

Today’s update from British Airways-, Iberia- and Aer Lingus-owner International Consolidated Airlines (LSE: IAG) is unlikely to disappoint long-term owners of the stock.

At €17.5bn, total revenue over the nine months to the end of September was marginally up on that achieved over the same period in 2016. Passenger unit revenue also increased over Q3 by 0.7% (up 2.2% when foreign exchange fluctuations are eliminated), a rise CEO Willie Walsh attributes to “improvements in the Spanish and Latin American markets“.

It gets better. Despite adverse weather and terrorist activity (not to mention the odd IT system failure), operating profit, before exceptional items, the £14bn-cap soared 21% to €1.46bn, beating analyst expectations. No doubt hoping fuel costs will continue to fall as they have in Q3, IAG now expects this figure to rise to approximately 3bn for the full year. 

Despite climbing almost 50% in value over the last 12 months, IAG’s stock still looks seriously cheap. Shares currently change hands for just eight times forward earnings, significantly less than that of listed budget airlines easyJet and Ryanair who, unlike IAG, are being forced to slash fares in an attempt to increase market share following the demise of Monarch, Air Berlin and Alitalia. 

Need another incentive? The fairly decent 3.9% yield is easily covered by profits and, based on today’s announcement, highly likely to rise moving forward. 

Another FTSE bargain

£9.2bn-cap asset manager 3i Group (LSE: III) is another company whose stock still looks good value despite stellar share price gains over the last 12 months (+ 44%). A P/E of just nine for the current year feels low even if — thanks to a one-off gain in 2016 — earnings per share are expected to fall by 35% in the current year, and by a further 4% in 2018. 

Recent developments at the investor include three new appointments to its private equity team and the acquisition of Smarte Card, described by the company as a “concessionaire of essential infrastructure equipment“, for $385m. Founded 50 years’ ago, Smarte Card operates in 2,500 locations across seven countries and claims to be — wait for it — the market leader in airport baggage carts and self-storage lockers. No, my pulse isn’t racing either. Nevertheless, having conquered the US market (from which it derives 80% of revenue), 3i believes the business is “poised for additional domestic and international growth“, particularly in Europe. 

While the forecast 2.7% yield isn’t quite as enticing when compared to the dividends on offer at IAG, the payout looks just as secure, suggesting future hikes could be on the cards. Factor in growing returns on the capital it invests, a lack of debt and decent cashflow, 3i looks like it could be a great addition to most portfolios. Assuming nothing negative comes to light in its forthcoming set of half-year numbers, I’m quietly confident there could be further share price gains for holders in November.

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.

Paul Summers has no position in any of the share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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