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Would I buy Rolls-Royce shares or International Consolidated Airlines Group shares?

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·3-min read
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That aviation is going through an awful time right now is an understatement. The upswing has started for most other segments of the economy, but we are still waiting for air travel to restart in earnest.

Not all aviation stocks are made equal

There are better days ahead in store though, I feel. And some aviation stocks have already run-up significantly in anticipation of better times.

Low-cost airline Wizz Air, for instance, was recently at all-time-highs. RyanAir, another low-cost carrier, saw its share price rise to three-year highs. easyJet has also seen significant gains over the past year. Yet the speedy share price rise for these stocks combined with the expected slow healing of their financial health makes me doubtful if they can rise more in the near future.

But there are two stocks in aviation I see as having much potential.

One is British Airways owner International Consolidated Airlines Group (LSE: IAG) and the other is aircraft engines’ provider Rolls-Royce (LSE: RR). They stand out for how little they have gained since last year’s market crash. IAG’s share price is actually lower than it was at the same time last year and the Rolls-Royce share price is almost at the same level.

Rolls-Royce or IAG – which is the better buy?

This could be a good opportunity to buy for me. But I do not want to expose myself a whole lot to aviation yet. So, I would like to buy shares of either IAG or Rolls-Royce, not both.

The question now is: which one of them is a better investment for me?

Three ways to assess

To assess this, I compared them across three parameters. One, their share price trends before the market crash. Two, their financial performances pre-pandemic. And three, their own outlooks for the rest of the year.

In understanding their share price performances, I considered the five-year period between early 2015 and early 2020. Turns out that both their share prices have dropped over this time, albeit with much fluctuation during the interim.

In terms of financial performance, IAG is ahead of Rolls-Royce. IAG showed steady growth in revenue and was also profitable in the three years before the pandemic. Rolls-Royce too saw growth in revenue, but it was loss-making for two of the three years. And now it has had another bad year.

The outlook for both companies has improved, with some caution of course. But I think Rolls-Royce may be better placed even if aviation recovery is slow. Besides civil aerospace, power systems and defence systems are important sources of revenue for it. And it is optimistic about their recovery.

If, however, air travel restarts as planned, IAG can start recovering too. It does mention a “high level” of pent-up demand in its latest update.

My takeaway

Based on this assessment, I lean towards IAG, largely because of its past performance. However, I will wait for another month to see how air travel picks up. That should indicate better which of the two is better placed.

The post Would I buy Rolls-Royce shares or International Consolidated Airlines Group shares? appeared first on The Motley Fool UK.

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Manika Premsingh owns shares of easyJet. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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