Warren Buffet oncereferred to the airline industry as a death trap for investors. Going byits 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 2016for airlines and anyone holding their shares.
That said, with many companies trading on low valuations,Im tempted to suggestthat these stocksare 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 flyingclose to their historical share price highs.
In March, it all started to fall apart as explosions at Brussels Zaventem airport chippedaway atinvestorconfidence. A few months later, once the dust had settled following the UKs referendum, shares in IAG, easyJet and Ryanair had all plunged over30% 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 werent prepared to waitfor them to recover.
Seriously cheap
Of course, buying companies trading on temporary price weakness can be an excellent strategy for turbo-charging your wealth. Thats 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 IAGs 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 ofjust 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 thanboth easyJet and IAG and decentreturns on capital. Despite not offering dividends to shareholders, it remains the only one to have staged a genuine comeback, rising almost 40% since Julys dip. Itmay not be the bargain it once was but theshares 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 witha chunky 4.2% yield. Thats an awful lot more than youd get from any savings account or from shares in IAG (1.9%).
But perhaps the best opportunityin the airline industry lies elsewhere. While small compared to itsaforementioned peers, Eastern Europe-focusedoperator, Wizz Air (LSE: WIZZ) boasts a net cash position of 772m and easily the best returns on capital. The fact that its 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 thesecompanies to recover and thrive. Far from avoiding airline stocks, Im 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.
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Paul Summers owns shares in easyJet. 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.