Cheap UK shares: should I buy Carnival or IAG stocks?

As cheap UK shares go, IAG shares could offer one of the best opportunities for long-term investors at current levels, says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you are looking for cheap UK shares to buy today, I think it could be worth taking a closer look at Carnival (LSE: CCL) and IAG (LSE: IAG) shares. 

Shares in cruise operator Carnival and airline group IAG have both fallen substantially this year. After these declines, the two stocks look cheap relative to history. 

However, I think the outlooks for these two businesses are substantially different. As such, one company looks to me to be a much better long-term investment. 

Today, I’m going to take a look at these two businesses, to try and establish which might be the best investment for the long run. 

Cheap UK shares

Despite the company’s troubles, IAG shares seem to me to be the better buy. Carnival looks cheap, but the company has some serious problems. 

At the beginning of the coronavirus crisis, the company made headlines when its Diamond Princess cruise ship became the most infected place in the world.

Since then, management has suspended all operations, and the group has repeatedly postponed the restart of cruises.

This has presented it with a dilemma. The company has no income, but it has had to keep its ships in a state of readiness. At the height of the crisis, this was costing the group $1bn a month. 

To fill the gap between income (or the lack of income) and expenditure, Carnival has borrowed billions.

Considering the company’s plight, creditors have demanded interest rates in the double-digits.

So, while Carnival might look like one of the best cheap UK shares to buy today, I think the company’s long-term outlook is highly uncertain.

At some point, the group will need to repay its crisis borrowing. This debt mountain is likely to weigh on the business for many years. 

IAG shares: a brighter outlook 

By comparison, the outlook for IAG is much brighter, in my opinion. 

Unlike Carnival, the company is operating some of its planes. This has reduced the stress on the group’s balance sheet and cash flows. The business has also been able to cut costs dramatically, which has provided management with further headroom. 

IAG has also had to borrow money to keep the lights on throughout the crisis, but it entered the situation with a much stronger balance sheet. At the end of April, the group had €10bn of cash and undrawn financing facilities. It has also raised nearly €3bn from investors. 

As such, I think IAG shares could be worth buying as part of a basket of cheap UK shares. The company will almost certainly face further turbulence in the near term. However, its strong balance sheet and stable of brands should help the group pull through the crisis.

Carnival’s outlook, on the other hand, is much less clear. The company’s balance sheet is starting to look stretched, and the group is facing a wave of legal issues from guests who travelled on its ships and caught the virus earlier on in the process. I think it is probably better to stay away from this uncertainty altogether. 

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.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »