In International Consolidated Airlines Group (LSE: IAG), the owner of British Airways, I’m torn between a company that seems to be doing well and looks seriously undervalued, and my long-term aversion to the aviation industry. It’s a business with little differentiation, limited control over costs, and competitive only on price.
IAG shares have lost a third of their value over the past 12 months. We’re now looking at a forward P/E multiple of under five, which looks to me to have seriously over-egged the gloom surrounding the industry — especially as the City is predicting dividend yields of around 6%.
British Airways has been in the news for the wrong reasons over the past week, as it’s been hit with a £183m fine following the hacking of its website.
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Industrial action
The airline is also trying to avert a pilots’ strike, with the British Airline Pilots’ Association having rejected an 11.5% pay rise over three years. The latest update Wednesday suggests talks have broken down.
The pilots say they deserve better because BA is making strong profits, and I think there’s a lesson there for investors. BA (and IAG) might be doing financially well right now, but it’s a very cyclical industry, and we shouldn’t judge its long-term health based on the past couple of years of healthy profits.
I’m still conflicted, as I genuinely do think IAG looks like a buy now. But I once set myself a rule to never buy airline shares, and I’m sticking with it.
Joint venture
Marks & Spencer (LSE: MKS) is another that splits my opinion now. For years I’ve been waiting for it to actually get up and do something, and for years it’s been tinkering with a ‘maybe this year’s clothing range will do better’ strategy.
But big things are now afoot. The company’s food range has always been very successful, as the venture into its Simply Food offerings suggests.
And the tie-up with Ocado, funded by a £600m rights issue, could be very big indeed. M&S chose to buy up half of Ocado for £750m, which will lead to M&S products replacing Waitrose’s on the latter’s website by 2020.
Investors don’t seem pleased by the idea of the new joint venture, mind, and the M&S share price is the second I’m looking at today that has fallen by around a third in the past year. In this case, the result is a P/E of only around nine.
Uncertainty
Forecasts are up in the air, so prospective ratios are to be treated with some suspicion. And a reduced dividend, rebased to “strengthen and secure the balance sheet for future growth,” has contributed to the share price bearishness.
There are a lot of reasons to be down on M&S right now, the biggest of which is surely that the company is facing massive uncertainty in the short and medium term. But I still can’t help thinking that such times can provide contrarian buy opportunities, and I think M&S could turn out to be underpriced right now.
But as with IAG, M&S is in a highly competitive business, with relatively low margins. I buy M&S’s prawn sandwiches, but I still won’t buy the shares.
