The outbreak of Covid-19 and the resulting sell-off in equities has affected certain stocks substantially more than others. Two companies that have suffered abysmally are Carnival (LSE: CCL) and International Consolidated Airlines Group (LSE: IAG). So much so that Carnival is due to be relegated from the FTSE 100 index later this month.
In the depths of the market crash, both saw their share prices tumble by eye-watering amounts (80% and 73% respectively). Since then global stocks have staged a recovery. However, both companies remain a long way from their pre-crash valuations. So, with the potential for some serious value, could Carnival and IAG shares be the bargains of the year?
Several factors contribute to Carnival’s share price ruin. The international cruise line operator has suspended all operations as its ships sit idle in harbours around the world. The company, which is already bleeding cash dangerously, has written off a summer return to operations and won’t be back to sail the seas until October at the earliest.
That said, I’m encouraged by the fact that the majority of guests affected by schedule changes want to sail in the future, with “fewer than 38% requesting refunds to date”. Moreover, staff layoffs, pay cuts, and a suspension of the dividend should strengthen the group’s liquidity position.
Since early April, Carnival shares have rallied by around 116%. It’s worth noting that while that is a staggering number, it is nowhere near enough to allow the company to recover its pre-crash valuation. To achieve that, the Carnival share price will have to extend its rally by around another 400%. Combine this revelation with a price-to-earnings ratio of 3.4 and the potential for significant value becomes increasingly clear. But the future isn’t certain. If holidaymakers fail to make a swift return to cruise ships and passenger numbers remain stubbornly low, Carnival’s long-term survival prospects will inevitably be in doubt.
International Consolidated Airlines Group
Likewise, the tumble in IAG’s share price seems relatively straightforward to comprehend. The impact of Covid-19 on the airline industry has been particularly palpable, with entire fleets grounded and many staff furloughed. IAG doesn’t expect passenger demand to recover before 2023 and admits that group-wide restructuring will be necessary for survival.
Nevertheless, the company is pinning their hopes on a “meaningful return” to service from July 2020, albeit in a reduced capacity. More importantly though, IAG has taken the necessary steps to bolster its liquidity position and boost cash reserves.
Ultimately, I’m sceptical about the doom and gloom that others cast over the long-term future of air travel. I expect it to play an equally important a role in a post-pandemic world as it did previously. As such, depending on how long the global economy takes to recover, IAG shares could prove to be great value for investors who buy today. A P/E ratio of 2.6 backs that thought up nicely.
Ultimately, I don’t see either of these companies going anywhere anytime soon. Provided operations can get up and running swiftly enough, I expect impressive share price gains to reward investors who took the plunge. However, only time will tell whether Carnival and IAG shares turned out to be the bargains of the year, and would-be investors must be prepared to ride this one out over the long term.
The post Could Carnival and IAG shares be the FTSE 100 bargains of the year? appeared first on The Motley Fool UK.
Matthew Dumigan owns shares in Carnival and International Airlines Consolidated Group. The Motley Fool UK has recommended Carnival. 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 2020