Shares in budget airline Flybe (LSE: FLYB) and oil explorer Afren (LSE: AFR) have certainly taken a hammering in recent times.
Afren has collapsed by almost nine-tenths in less than six months owing to a declining oil price, and a further 5.1% fall today has pushed prices to fresh six-year lows below 19p per share. Meanwhile, budget carrier Flybe has led the London laggards in Monday business, shedding more than 24% on the back of a worrying trading update.
But could either of these stocks be a bargain at current prices?
Flybe set for take off
Flybe has worried investors by advising that passenger revenues slipped 3.8% during the third quarter to £126.8m, a result that the board estimates will cause pre-tax profit break even for the year concluding March 2015.
Still, I believe that these troubles — the result of intense competition as new routes out of London City take longer to mature — represent temporary bumpiness in Flybe’s otherwise strong investment case. As the business notes, Flybe is at the fledgling stage of a three-year streamlining programme, which has seen it slash staff numbers and ground planes amongst other measures, and promises to deliver much more in coming years.
Meanwhile, the relentless demand for budget travel looks set to keep activity at the carrier ticking higher. Flybe has seen forward seat bookings for this year edge to 36% from 34% in fiscal 2014, and has launched 20 new routes for summer 2015 in a bid to cotton onto favourable long-term demand drivers.
And today’s price dive leaves the airline dealing at delicious price levels given expectations of strong earnings growth for the coming years. Indeed, Flybe carries a P/E multiple of just 8.7 times for fiscal 2016 — comfortably below the value benchmark of 10 times or below — and which shifts to just 4.7 times for 2017. I believe the airline is a terrific pick at these prices.
Afren’s tailspin shows no signs of slowing
On the reverse, I believe that a backcloth of surging market supply and insipid demand makes oil play Afren a dicey stock pick. Shares continue to tumble as brokers take the red pen to their fossil fuel forecasts on a near-daily basis, and with it Afren’s earnings estimates for this year and next.
The Brent crude price continues to flirt with the six-year lows around $45 per barrel touched this month, and with data from commodities-hungry China continuing to disappoint and the eurozone seemingly lurching back into recession, further heavy weakness could be on the cards.
The quality of Afren’s projects in East Africa and Madagascar are undoubtedly incredibly promising, but the economic viability of developing these projects at current oil prices — allied to the naturally unpredictable nature of fossil fuel exploration and development — makes the company a risky earnings pick in my opinion. On top of this, a massive reserves downgrade at its Kurdistani assets this month has done nothing to improve investor sentiment.
City brokers expect Afren to see earnings slip 66% in the current year, creating what I would deem an unattractive P/E multiple of 14.4 times given the multitude of risks facing the company. And although an anticipated 95% bottom line surge in 2016 pushes this to 4.1 times, I believe that the chances of such a resurgence continue to rapidly diminish.
