I’m searching for the best cheap UK shares to add to my portfolio in May. And these two FTSE 100 stocks have grabbed my attention.
Both trade on price-to-earnings (P/E) ratios below the FTSE aveage of 14 times. So which should I buy right now?
International Consolidated Airlines
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British Airways owner International Consolidated Airlines (LSE:IAG) is thriving in the post-pandemic landscape.
Strong ‘revenge spending’ in the travel segment has continued long after the end of Covid-related lockdowns. And airlines are steadily ramping up capacity to exploit the favourable landscape. IAG expects its own capacity to reach 98% of 2019 levels this year, up a fifth from last year.
City analysts are expecting annual earnings here to surge 217% in 2023. This results in a forward P/E ratio of just 9.1 times.
I’m not tempted to buy IAG shares however. I think current forecasts looks fragile as the global economy struggles and high inflation persists.
I’m not just worried about falling ticket sales to holidaymakers and business clients. The FTSE firm could also see a sharp decline in cargo profits due to weak economic conditions and easing supply chain problems. German carrier Lufthansa’s cargo division saw revenues drop year on year in the first quarter as freight rates eased, it announced on Wednesday.
This is a concern to me given IAG’s high debts which it will struggle to pay down if business dries up. And this could scupper City expectations that the firm will start paying dividends again in 2023. Net debt stood at €10.4bn as of December.
On top of this, IAG could generate disappointing cash and profits if costs continue to head higher. Fuel and labour-related expenses in particular cast a shadow over earnings during the short-to-medium term.
B&M European Value Retail
For these reasons I’d rather spend any cash I have to invest on another cheap FTSE 100 share: B&M European Value Retail (LSE:BME).
Okay, the business trades on a higher P/E ratio of 13.5 times for this financial year (to March 2024). And profits here are endangered by rising competition in the discount retail arena.
But it’s worth remembering that B&M’s forward earnings multiple sits below the FTSE average. And its earnings estimates look more robust in my view than those of many other UK blue-chip shares, suggesting its shares offer solid value for money.
B&M is a counter-cyclical company that stands to gain from sustained pressure on shoppers’ wallets. In fact the business has traded stronger than expected of late, and it hiked profit forecasts for the last fiscal year in January following a strong end to 2022.
Like-for-like revenues rose 6.4% during the three months to December. I’m expecting trading to remain robust too, as high inflation keeps household budgets under pressure.
But I believe the business is more than just a great short-term pick. Value retail has been growing rapidly on these shores for more than a decade. And the company continues expanding its store estate to capitalise on this theme. B&M plans to grow its UK store estate by around a third, to 950 units.
