The arrival of coronavirus vaccines has sent stocks in the travel and leisure industry flying in recent weeks. Airline International Consolidated Airlines (LSE: IAG) has been one of the standout performers. Indeed, IAG’s share price is now over 60% higher than it was at the beginning of November.
Despite this stellar return in such a short space of time, I’m still not tempted to buy. In my view, there’s a far better pick for my ISA within the travel industry.
Adjusted profit at the business tumbled to just £600,000 for the year to the end of September, due to lockdowns across Europe. That’s staggeringly small when you consider On the Beach is valued at getting on to £600m.
As bad as this sounds, I’m optimistic it will be able to recover from 2020’s woes. I’d certainly be more likely to pay up for its shares over those of IAG.
Reasons to be optimistic
On the Beach benefits from being a purely online, asset-light entity. This means it’s none of the fixed costs that physical travel agents must pay, even if no/very little revenue is being generated. This is partly why, prior to the pandemic, it was generating excellent returns on the money invested in the business.
Contrast this with IAG. The fact the airline is barely flying at anywhere near capacity right now doesn’t mean all costs have been drastically reduced. Aircraft still need maintaining whether they’re in the air or not.
As well as being asset-light, On the Beach’s business model is very flexible. If issues occur in specific destinations, it can quickly move its marketing spend elsewhere. IAG, or any airline for that matter, isn’t quite so adaptable.
Also, On the Beach has a far sturdier-looking balance sheet than IAG. Excluding customer pre-payments, it has £51m in net cash at the end of last month. The sale of artwork by British Airways back in November is a great indication of just how bad things are over at IAG.
Naturally, all investments involve risk and On the Beach is no exception. While its aforementioned qualities should provide better protection over others in the space, the ongoing saga that’s Brexit could still cause the share price to be volatile in the near term.
As things stand, we still have no idea whether a Brexit trade deal will be agreed before the end of the transition period on 31 December.
Even so, I don’t think a ’90-day rule’ on travellers visiting the continent from the UK is likely to bother OTB’s customer base for long. Nor will queueing in a different lane at border control or getting a passport for their pet. They just want to go on holiday for a week or two!
Is On the Beach the best UK share to buy now? No. Does it have the qualities to survive and thrive after the coronavirus storm has passed? Very probably.
Some may be drawn to the IAG share price as a momentum play. Then again, I know which business I’d rather own within my ISA. On the Beach goes on my watchlist.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach. 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.