INTERNATIONAL CONSOLIDATED AIRLINES (IAG) 705.4P
THE BRITISH AIRWAYS owner still looks cheap despite a decent run for the share price since October 2016.
The airline trades on a mere 7.1 times forecast earnings compared to its peers which have an average PE of 12.67, including rivals such as
Ryanair (RYA) and EasyJet (EZJ). IAG also has an attractive 9.6% free cash flow yield.
While the airline sector is starting to recover from an intense price war, analysts have been wary of a range of risks including rising fuel costs and the impact of Brexit negotiations.
Although IAG’s most recent full year results, published in February, slightly missed expectations at the operating profit level, a subsequent update shows a business in good health.
Its first quarter results showed a 75% jump in operating profit to €280m, smashing consensus expectations of €206m and helped by favourable exchange rates, the timing of Easter and a continuation of improvements that began in 2017. That news, plus a new €500m share buyback, has helped to strengthen the share price.
The airline is trying to acquire embattled rival Norwegian Air Shuttle after buying a 4.61% stake, but has already had two ‘undervalued’ takeover offers rebuffed.
Norwegian runs ultra-cheap US flights from Europe but doesn’t make any money and is drowning in debt. IAG’s interest in the business looks like a mixture of defending its own transatlantic operations from low cost competition, plus an opportunistic move while Norwegian’s own valuation is very cheap. (LMJ)
PUT SIMPLY, Barclays is one of the cheapest UK banks. According to data from Reuters, it trades on a price-to-book ratio of just 0.6-times, quite a bit below its peer group average of 0.9-times. However its first quarter results to 31 March go some way in explaining the relative cheapness of the financial institution, having recorded a pre-tax loss of £236m.
This loss was largely due to the cost of settling a historic case with the US Department of Justice over the mis-selling of mortgage-backed securities. Barclays had to pay the US regulator £1.4bn to settle the matter and a further £400m in relation to ongoing Payment Protection Insurance claims.
However, if these misconduct charges are stripped out, the bank’s pre-tax profits actually increased by 1% to £1.73bn. This was driven by a 45% improvement in impairment charges and a 6% reduction in operating costs.
A key sign of a bank’s profitability is its return on tangible equity (ROTE); last year Barclays posted a worst in class 1.1%. However, for the first quarter of 2018 the bank’s ROTE was an impressive 11% when exceptional items such as litigation charges are stripped out. Given that Barclays has now settled with the Department of Justice the bank’s return to profitability should continue and its shares could re-rate.
However, you should note activist investor Edward Bramson recently appeared on the shareholder register with a 4.9% stake held via investment vehicle Sherborne Investors (SIGC).
Little is known about his intentions but media reports suggest his presence is unwelcome given Barclays’ management are focused on reviving the business and could do without the distraction of a shareholder who may push for big M&A deals.
As such, you should treat this stock as fairly high risk although you do get some compensation in the form of a dividend yield in the region of 3.2% based on current year forecasts, rising to 4.1% in 2019 and 4.6% in 2020.
Those figures are less generous than the yields you could get from HSBC (HSBA) and Lloyds (LLOY), although they are arguably less risky investments (relative to the broader sector) and so the potential rewards may not be as high as from Barclays if the latter can rejuvenate its business.
ON PRICE-TO-EARNINGS metrics Strix trades at a rough 50% discount to peers, according to Reuters’ data. Based on 2018 earnings estimates, Strix trades on a PE of 10.6, falling to 9.8-times in 2019.
The company designs and makes clever controls and safety devices fitted on many of the 70m kettles sold worldwide each year. They appear on brands you should recognise including products from Bosch, DeLonghi, Kenwood, Russell Hobbs and more.
Strix’s intellectual property-protected devices are widely considered best-in-class, demonstrated by long-term relationships with over 400 brands and retailers. It claims to have about 40% of global market share.
There are cheaper copycat devices available but many mainstream volume makers stick with Strix and pay more because they trust the equipment and are likely to avoid expensive product recalls. That should help Strix defend 30% to 33% operating profit margins.
Yet the wider kettle market is also growing faster than before, largely because more affluent Chinese people can afford household labour-saving luxuries. Between 2012 and 2017 the market averaged 5.6% growth a year but this pace is expected to accelerate to 7%-plus through to 2020, say analysts.
Strix has generated over £30m of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in each of the last 10 years, and is very cash generative. That helps to fund generous dividends with the shares currently yielding 5.4%, far higher than the 3.6% FTSE All-Share average.