You can find some top FTSE 100 stocks trading at dirt-cheap prices following the stock market crash, but not all are worth buying. Some sectors have been hit so hard by the Covid-19 lockdown, their recovery can’t be taken for granted.
I love buying household name FTSE 100 stocks at bargain prices, but I don’t think these two are good value.
The airline industry has been pulverised by the pandemic, and the headwinds remain strong. British Airways owner International Consolidated Airlines Group (LSE: IAG) now faces an uncertain future, as does every carrier.
Stock market crash victim
The IAG share price plummeted during the market crash in March, along with almost every other FTSE 100 stock. It staged a brief recovery as travel restarted, only to fall again as air corridors closed and flights were grounded.
Foreign tourism has effectively collapsed. Governments are extending travel bans rather than easing them. Even when things do open up, people may lack the confidence to book holidays. Millions won’t be able to afford it, if they lose their jobs as furlough schemes end this autumn. IAG won’t be the only FTSE 100 stock to suffer.
The group is lining up a £2.5bn rights issue to boost its balance sheet. It’s little choice, as it’s been burning through cash at a rate of £178m a week. However, this looks set to dilute existing shareholders by at least 50%.
Many in the travel industry suspect it’ll take up to four years before normal service is resumed, with plenty of turbulence on the way. But you may find it impossible to resist today’s valuation of just two times earnings. That’s astonishingly low for a FTSE 100 stock. Just make sure you understand the high risks involved.
Another FTSE 100 share I wouldn’t buy
The IAG share price is down another 6% this morning as it’s hit by the controversy over the TUI ‘Covidiots’ flight from Greek island Zante. Some 16 people have tested positive after safety procedures were allegedly ignored.
I’m not boarding IAG right now and the same goes for fellow FTSE 100 stock Rolls-Royce Group (LSE: RR), also down 6% today. Investors are still absorbing last week’s dismal results, which revealed a first-half pre-tax loss of £5.3bn.
As an aircraft engine maker, the group is collateral damage from the travel clampdown. It earns a large chunk of its revenues from servicing engines, with contracts based on hours flown. These, of course, have collapsed. Its Civil Aerospace business now faces massive restructuring as the group disposes of a fifth of its workforce, 9,000 roles in total, and looks to offload £2bn of assets.
While many FTSE 100 stocks have recovered from the market crash in March, the Rolls-Royce share price has ground lower and lower. It’s down two thirds since the start of the year. Anybody who buys today must accept the danger that Rolls-Royce could launch a rights issue to boost its balance sheet, which could dilute your holdings. It’s too risky for me.
