Since midsummer 2014 the price of oil has declined from over $100 barrel to around $30. Oil stocks have been hard hit by the rout. Butsome industries have benefitted, airline stocks being among the biggest beneficiaries.
Duringthe great oil price collapse, producer BP (LSE: BP) has suffered a 33% fall in its shares. Meanwhile, the London markets biggest airline group International Consolidated Airlines (LSE: IAG) the owner of British Airways has seen its shares soar 50% higher.
But will BPs shares continue to sink and will IAGs shares continue to fly?
At a recent price of 343p, BP trades on 14.7 times forecast 2016 earnings (a little above the market average), with modest projected earnings growth of 6%. At558p, IAG trades at a bargain 7.6 times forward earnings, with supersonic growth of 40% forecast.
The price-to-earnings growth (PEG) ratio is a similar story. BP trades on a rich PEG of 2.5, while IAG is at a bargain-basement 0.2.
With no sign the price of oil willrise soon, it seems almost perverse that BP commands a relatively high rating, while IAG is priced at outstanding value. Surely, BP is no better than an average investment and IAG is a storming buy?
Warren Buffett and oil
Its always worth watching and listening to the worlds greatest investor Warren Buffett, particularly in uncertain times like today when identifying real bargains and avoiding potential value traps isnt always easy.
A couple of weeks ago, CNBC reported:
Warren Buffett is extending his big oil bet amid the crude market wreckage. His buying streak extended to a seventh day Tuesday, new filings show, as Buffetts Berkshire Hathaway bought another 861,000 shares of Phillips 66
Januarys buying follows Buffett more than doubling his stake in the Texas refining giant in the second half of last year. Hesmade a couple of badly-timed oil investments in the past decade, but it seems unthinkable he would make the same mistake a third time. Certainly, his persistence shows a continuing belief that theres good money to be made from investing in the oil sector.
Buffett and airlines
In contrast to his views on oil, Buffett has long held that the airline industry is unattractive. This aversion goes back a quarter of a century to an investment in US Air, in which he says he got very luckybymanaging to exit at a profit.
Some of his most amusingly acerbic comments have been reserved for the airline industry:
- As of 1992 the money that had been made since the dawn of aviation by all of this countrys airline companies was zero. Absolutely zero. (Interview, 1999)
- if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville [Wright]. The airline industrys demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. (Berkshire Hathaway letter to shareholders, 2007)
- Its been a death trap for investors. (Berkshire Hathaway AGM 2013, when asked whether airline consolidation had altered his views)
Why is Buffett so against airline investments? Huge fixed costs, commodity pricing and absence of a durable competitive advantage or moathes said. These are anathema to Buffett in a consumer-focused business.
If he had to choose between BP or International Consolidated Airlines, I think we can guess which hed choose!
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.