Why there’s big potential upside for the airlines.
Shares in International Consolidated Airlines Group (LSE:IAG), Ryanair (LSE:RYA), easyJet (LSE:EZJ) and Air (LSE:WIZZ)have been cleared for take-off by a leading City bank after its analysts backed the European airlines sector to ride out the current Brexit and economy-related turbulence.
Bank of America Merrill Lynch’s ‘overweight’ coverage of European airlines reflects its belief that the market has gone too far in pricing stocks for an outright recession on the continent. They don’t subscribe to this economic scenario, meaning there’s a big potential upside for the sector should key indicators turn positive as they expect in the coming months.
And with the basket of European airline stocks down by roughly 30% so far this year, the analysts regard now as an opportune time to gain exposure to high quality companies with strong balance sheets, such as British Airways owner IAG or Ryanair.
European airline price/earnings (PE) multiples are now 15% lower on average over the past year and trading at about 7.5x 2020 earnings — a discount to global airlines. The note said: “Although a worsening macro outlook is a headwind, we think this is reflected in shares with valuations at historical lows.”
It’s why the broker rates IAG, Ryanair and Wizz Air as a ‘buy’, with price targets of 660p (currently 482p), €13.5 (€10.91) and 4,100p (3,674p) respectively. Orange-liveried easyJet is rated ‘neutral’, with price target of 1,200p (1,172p).