Warren Buffet once referred to the airline industry as a “death trap” for investors. Going by its performance over the past year, few would argue with the Sage of Omaha. The growing possibility that some staff at British Airways will strike over the Christmas period caps off an awful 2016 for airlines and anyone holding their shares.
That said, with many companies trading on low valuations, I’m tempted to suggest that these stocks are now firmly in bargain territory.
Grounded
Cast your mind back to January. Back then — before the Brexit vote — shares in British Airway and Iberia owner, International Consolidated Airlines (LSE: IAG), easyJet (LSE: EZJ) and Ryanair (LSE: RYA) were all flying close to their historical share price highs.
In March, it all started to fall apart as explosions at Brussels’ Zaventem airport chipped away at investor confidence. A few months later, once the dust had settled following the UK’s referendum, shares in IAG, easyJet and Ryanair had all plunged over 30% on concerns that profits would be hit hard. easyJet, in particular, warned that the weaker pound would deter UK holidaymakers from venturing abroad as well as making fuel more expensive. Air traffic control strikes in France during September only served to compound shareholder misery. While certainly not the worst performing shares over the last 12 months, many weren’t prepared to wait for them to recover.
Seriously cheap
Of course, buying companies trading on temporary price weakness can be an excellent strategy for turbo-charging your wealth. That’s assuming you pick the right stocks and have the patience to wait for other investors to recognise their value. So, which airline offers the best deal for investors?
£9.5bn cap IAG’s current price-to-earnings (P/E) ratio of a little under seven makes its shares the cheapest to buy right now. Luton-based easyJet is more expensive with a P/E of just under 12. Ryanair is the most expensive of the three, with a P/E of 14. Nevertheless, the Dublin-based airline has £65m net cash on its balance sheet, higher operating margins than both easyJet and IAG and decent returns on capital. Despite not offering dividends to shareholders, it remains the only one to have staged a genuine comeback, rising almost 40% since July’s dip. It may not be the bargain it once was but the shares still have appeal.
For dividends, easyJet easily comes out on top. While recently announcing that it would be reducing its bi-annual payouts, the shares still come with a chunky 4.2% yield. That’s an awful lot more than you’d get from any savings account or from shares in IAG (1.9%).
But perhaps the best opportunity in the airline industry lies elsewhere. While small compared to its aforementioned peers, Eastern Europe-focused operator, Wizz Air (LSE: WIZZ) boasts a net cash position of £772m and easily the best returns on capital. The fact that it’s based outside of the UK means it should also be relatively sheltered from Brexit-related concerns. A P/E of just under 11 looks too low to me.
In the medium-to-long term, I fully expect all of these companies to recover and thrive. Far from avoiding airline stocks, I’m tempted to think that value-focused investors will struggle to find a better opportunity to invest than now, even if the details of Brexit still need to be finalised.
