Due to concerns about the impact Brexit might have on the UK economy, shares in some of the UK’s biggest companies are currently changing hands for bargain-basement valuations.
Today, I’m looking at two such FTSE 100 stocks and explaining why I would buy them at the current price.
International Consolidated Airlines (LSE: IAG) will almost certainly suffer if the UK economy slumps post-Brexit. An economic crash will depress wages, which means consumers will have less money available to spend on things like holidays, so IAG’s sales will fall.
That said, as a global airline business, IAG’s customers come from all over the world, so even if the UK economy does crash, I think the group’s international diversification will help it weather the storm.
The market doesn’t seem to agree. Indeed, right now the stock appears to be pricing in a one-third decline in profits. Shares in the airline are dealing at a forward P/E ratio of 6.5, compared to the airline industry average of around 9.5.
I don’t think the company deserves this valuation for two reasons. Firstly, because I believe it’s unlikely earnings will fall by 30% in the near term and, secondly, the company is one of the most profitable European airline groups. It reported an operating profit margin of 12% for 2017, against the industry average of less than 10%. A better-than-average profit margin usually deserves a premium valuation to the rest of the industry.
As well as its sector-leading profit margins and discount valuation, shares in IAG also support a dividend yield of 4.3%.
Considering all of the above, I think the stock is oversold, and patient investors could be well rewarded buying IAG today — with a 4.3% dividend yield, investors will also be paid to wait for the recovery.
Shares in travel business TUI Travel (LSE: TUI) are suffering from the same kind of negative investor sentiment. Unfortunately, the company’s recent trading updates have done little to reassure investors that they should be investing in this business.
Still, as my Foolish colleague Peter Stephens recently pointed out, while Tui’s near-term outlook might not be attracting investors to the stock, the company’s long-term potential is more attractive.
As one of the biggest holiday and tour operators in Europe, Tui has unrivalled buying power and economies of scale, meaning it can offer discounts and experiences other holiday companies cannot. With this being the case, I’m optimistic about the firm’s long term potential. Consumers will always be looking for holidays and holiday packages, which tells me that while the industry might have to navigate some choppy waters, over the long term, demand should only increase.
On that basis, I think the stock’s current valuation of just seven times forward earnings offers a lovely opportunity to buy into this long term growth story. Only adding to the appeal is a dividend yield of 8.3%, which means that investors in Tui, just like those of IAG, will be paid to wait for the share price recovery.
Rupert Hargreaves owns no 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.