Shares in Fastjet (LSE: FJET) soared by as much as 10% yesterdayand this brings the budget airlines gains to 47% in the last month. A key reason for this is the approval of new routes during the period thathave the potential to transform the companys long-term financial outlook. For example, Fastjet now operates daily flights between Kenya and Tanzania, with approval being granted in recent days for flights between Zimbabwe and South Africa too.
While Fastjet is expected to post a pre-tax loss of 21m for the 2015 financial year, its bottom line is forecast to move into profit in the current year. In fact, Fastjet is due to report a pre-tax profit of 6m in 2016 and even though its shares have risen by such a large amount in recent weeks, it still trades on a price-to-earnings (P/E) ratio of just 8.1.
Clearly, such a low valuation may be of interest to value investors searching out a bargain. However for Warren Buffett, Fastjet may not hold great appeal. Thats because he has tended to buy stakes of well-established companies that dontrequire any kind of turnaround. In fact, on that topic hes believed to have said that turnarounds seldom turn. As such, the fact that Fastjet is a lossmaking company thats due to move into profitability may mean that it lacks appeal in his view.
Better off with BA?
More likely, Warren Buffett would purchase established companies thathave relatively wide economic moats. Among airlines, British Airways owner IAG (LSE: IAG) is probably the company with the largest economic moat. Thats because in an industry in which consumers are highly price-conscious, British Airways retains a high degree of customer loyalty. This allows it to charge a higher price than many of its rivals, with lucrative take-off/landing slots also helping it to deliver relatively resilient financial performance.
Looking ahead, IAG is expected to increase its bottom line by 36% in the current year and while its shares have risen by 263% in the last five years, they still trade on a P/E ratio of just 7.2. This indicates that theres major upward rerating potential ahead especially with the price of oil set to remain low.
Dont just book it buy it
Similarly, buying Thomas Cook (LSE: TCG) could also be a good move. It has a degree of customer loyalty thathas been built up over a long period, thereby providing it with a relatively impressive economic moat. However, with holidays being more cyclical than scheduled flights, Thomas Cooks long term financial performance may be more volatile than that of IAG.
Still, with Thomas Cook forecast to increase its bottom line by 27% in the current year and having a P/E ratio of only 9.2, it remains a stock thatcould be of interest to value investors such as Warren Buffett.
Despite this, there’s another stock thatcould be an even better performer in the coming years. In fact it’s been named as A Top Growth Share From The Motley Fool.
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Peter Stephens 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.
