Last week was another bad one for most FTSE 100 stocks. The index rallied early in the week, but by Friday it was down again. As such, the Footsie has now lost 12.7% of its value in just two weeks. That’s quite a slump.
However, there are five stocks in the index that have crashed over 30%! Could these badly beaten-up blue-chips now be bargain buys?
We know the coronavirus is having an economic impact on many businesses, because they’ve told us so. They’ve also told us they don’t yet know how severe the impact will be. Things could get worse before they get better. It’s even possible the spread of the virus could trigger a global recession.
If you’re a long-term investor, with a regular investment plan, it makes sense to keep calm and carry on accumulating shares. Buying at discount prices will enhance your wealth in the long run.
Having said that, you need to be confident the businesses you’re investing in not only have good prospects of growing their earnings over the long term, but also the financial strength to negotiate any shorter-term economic hardship. With this in mind, how do the Footsie’s five 30%+ fallers measure up?
Top two fallers
The share prices of holidays firm TUI and cruise ship operator Carnival have crashed 37.4% and 34.2%. At 533p, TUI is trading at 5.7 times its average annual earnings of the last three years. At 1,981p, Carnival’s multiple is 6.2 times.
Clearly, these shares offer considerable upside, if the companies’ earnings return to their recent levels in future, and the market re-rates them to anywhere near the Footsie’s average historical earnings multiple of 15.
However, with TUI’s net debt at 3.5 times its EBITDA, seasonal swings in cash flow, and wafer-thin profit margins, I’m not entirely comfortable the business is well positioned in the event of a severe or protracted economic downturn in the near term. Carnival’s net debt/EBITDA is a more reasonable 2.0 times.
Furthermore, the cruise ship operator’s interest cover is much stronger than TUI’s, and its valuation is also far better supported by its tangible net assets. As such, while I’m not sure about TUI, I rate Carnival a ‘buy’ for the long term.
The share prices of budget airline easyJet and British Airways owner International Consolidated Airlines (IAG) have also crashed heavily over the last two weeks. They’re down 33.7% and 30.7%. At a share price of 1,000p, easyJet trades at 11.7 times its average annual earnings of the last three years. For IAG, at 432p, the multiple is 4.6.
Despite easyJet’s richer earnings multiple, I’m attracted by its modest net debt/EBITDA ratio of 0.7, versus IAG’s 1.5. The budget airline also boasts stronger interest cover. On this basis, I’d be happy to buy easyJet’s shares for the long term, but I think IAG is a possibly riskier proposition in the airlines sector.
Down in the depths
Finally, miner Evraz is the only FTSE 100 stock outside the travel & leisure industry to have suffered a two-week fall of over 30%. Miners have generally performed worse than the wider market, but Evraz’s 30.5% drop stands out. At a share price of 269p, it trades at just 4.4 times its average annual earnings of the last three years.
However, personally, I prefer other stocks in the sector to this Russian oligarch-controlled company, with a net debt/EBITDA ratio of 1.9.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. 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.