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Is British Airways a 15% p.a. compounder for the 2020s?

Is British Airways a 15% p.a. compounder for the 2020s?
17 January 2020

Image by RickDeacon / Shutterstock.com

You'll be surprised to read about British Airways (BA) on my blog. All the more, since this company is not itself listed on the stock market. You need to buy into Madrid-listed International Airlines Group (IAG, ISIN ES0177542018), a holding company that owns 100% of British Airways. The holding company had been formed out of a merger of BA and Iberia, and since then has also acquired Aer Lingus, Vueling, and Level (making it the third largest airline company in Europe). BA makes up the majority of IAG's business.

Based on my analysis, IAG could be a share to buy and tuck away for the next ten years. Across the next decade, it could make an average 12% to 15% p.a. for its shareholders. That would be anything but a bad return from a company that has been in business for a century, and the stock of which is a highly liquid blue chip.

In my view, IAG stock is one for the retirement portfolio. I am so bullish about it, that I just released one of the most complex research reports I have ever written.

A jumbo jet of a research project

I have just summarised my research on IAG in a 108-page report [1]. It's a real humdinger of a document, and it saw me burning a lot of midnight oil during the past few weeks.

Some will say that I am mad. However, I believe the target of my research will have been well worth the effort.

By making this call, I take a position that is highly contrarian compared to what you can usually read in the mainstream media.

Newspapers and TV stations mostly portray BA as a shadow of its former glory. Massive cuts to inflight catering, constant delays at Heathrow, and that costly customer data leak in September 2018. Yada, yada, yada. You know the story. Surely, this would reflect on IAG's stock price?

Why, then, is the stock price up 220% over the past ten years?

Compare that to Lufthansa, up just 29% since 2010. Or AirFrance/KLM, down 9% over the past decade.

True, BA isn't as plush an airline as it once was. I hear you on that one, having been a BA Frequent Flyer myself for nearly two decades.

However, something seems to be going right at the newly constituted IAG/BA.

Indeed, here are a few facts you are unlikely to be aware of:

  • Highest profitability of all major European airline companies.
  • Low indebtedness and multi-billion cash reserves.
  • 100% flawless track record in acquiring other airlines and making them profitable.

Customers did see cutbacks to service, but that has led to a responsibly managed and financially successful airline. What good is inflight tea service if it needs to be subsidised by shareholders or funded through repeated government bailouts? By focussing on cutbacks to excessive costs, the media missed the core of the real story.

My report covers aspects that you are unlikely to find spelled out in detail elsewhere.

For example:

  • Why higher oil prices and a recession would ultimately be good for IAG's business.
  • IAG's little-known plans for Madrid-Barajas, or "Heathrow 2" as I like to call it.
  • How BA could use its multi-billion-pound portfolio of airport slots to make some waves on the financial markets – a little-known but fascinating subject.

The report even includes figures that I assume the company would rather not see circulate in public. I managed to procure them regardless, using the growing network of industry experts I count among my readers.

IAG chart

I expect IAG stock to reach new record highs.

Completing my set of three investment opportunities from Britain

There are European airlines, and then there is IAG. Few investors have realised this yet, though. However, I believe the market's perception of the company is likely to change over the next 12 to 24 months. It would have changed already if the market hadn't been so distracted by all the political shenanigans in the UK over the past three years.

Now that the fog has started to clear in Westminster, I expect that a growing number of investors will realise just what IAG has in its pipeline for the next ten years.

I have already published reports about two other British companies. In one case, I predicted a bid by a Sovereign Wealth Fund. A mere four weeks later, an investor backed by the Saudis made a bid approach. In the other case, I predicted the company was going to be sold off to the highest bidder. Earlier today, I sent a note to my Members to update them how this situation has been advancing (and that stock is up, too).

I like Britain, and I believe that some of Europe's best investment bargains can currently be found across the English Channel. After these two successful reports about British stocks, I wanted to add another one. All good things being three.

It took me a while to find the right company, and I am excited to introduce IAG as one of the most promising British stocks. Or Spanish stocks. Or global companies. You can choose how you want to view it. For me, IAG is primarily BA, for now. What's more, with a p/e of just 5.4, IAG stock is trading at a ridiculously low valuation. It wouldn't be unreasonable to say that by buying into IAG, you are basically getting co-ownership of BA at an attractive price and the other airlines are all thrown in for free. That's not technically speaking the right way to look at it, but it illustrates the point. IAG stock is currently dirt cheap. The market has been so distracted by the UK's efforts to become a sovereign nation again, that it forgot to pay attention to the underlying fundamentals of the company.

However, as always, there is a catch. Or at least, that was the case until earlier today. At 8am this morning, IAG removed the single biggest hurdle that existed for its share price going higher.

The temporary ownership restriction for non-EU citizens has fallen

Britain's upcoming leaving of the EU had brought some temporary complications, which helped make this bargain become available in the first place.

European airlines have ownership rules, i.e., they need to be majority-owned by EU citizens to benefit from the EU's "Open Skies" rules.

UK citizens soon won't be EU citizens anymore, which left IAG in a bit of a pickle. EasyJet and Ryanair have had similar problems; Ryanair, despite being an Ireland-based airline, thanks to its hefty presence in the portfolio of UK citizens.

To cut a long story short, several restrictions were placed on trading IAG stock:

  • EU citizens (other than UK) were able to freely buy and sell IAG shares.
  • UK citizens were never restricted in freely buying and selling IAG shares, but they were limited to enjoying the financial benefits of being a stockholder, such as receiving dividends. They were temporarily banned from using their governance rights, such as voting at the shareholder's meeting.
  • Citizens from the rest of the world were put under severe restrictions. They were simply banned from buying IAG stock. That did hurt the stock!

Today at 8am, IAG announced that it will lift the restrictions on non-EU citizens. At least, for now. Though it's highly unlikely that they will return, for reasons I have analysed in my extensive report.

American institutional investors, in particular, are now likely going to take a strong interest in IAG. I explain this, too, in my report. The stock has already started to move, indicating that the market is sensing that a change to the situation is going to happen soon.

I had prepared my report expecting these developments to take place. Now that the cat is out of the bag, I have sent it to my site's Members.

It's a complicated investment case, but one that I enjoyed taking apart for my Members. Learning about IAG also teaches you a lot about how the stock market works, and how the airline industry has evolved in fascinating ways. Many of my readers are enjoying these reports not just because of the investment angle, but because it also teaches them about how the world works.

The magic sauce is reserved for my Members

You might wonder why I am giving away the name of the company so freely.

If you believe that you have got what it takes to analyse IAG yourself, go ahead. The investment case actually rests on a few facts and figures that are not easy to research. I had help from experts in the industry, and benefitted from information that I doubt you'll find anywhere in the company's publications or the Internet. I wish you the best of luck in trying to come to grips with this investment case.

Unless you have access to my entire report [2], you'll only know a fraction of the real story.

That's why I don't mind sharing the company's name publicly. Besides the fact, that it's a GBP 12.6bn / EUR 14.8bn company with a very liquid stock. My report sure won't move the price (if it's moving a lot today and next Monday, it'll be due to the announcement about the end of the ownership restriction).

My Members are investors who like to form their own view, and I provide them with all the background information they need to do so (while, hopefully, having a good time). You can get access to my latest and all past reports by becoming a Member of my website. It takes just a few minutes.

My Members also benefit from my efforts to time these opportunities. While you are reading this, I am already onto researching and writing up the next non-consensus opportunity.

Going against conventional wisdom is one of the hardest things in investing – but also the most fun!

I'll stop digging out more British stocks now – let's just enjoy the further ride

Of the ten stocks I featured in reports last year, two were British. Today's report is also about a British company. That makes three British companies out of the last eleven reports. That'll be enough for now. I don't want to turn this website into "Undervalued-Britain". My work on this subject is done for the time being. There can be too much of a good thing, and my site is aimed at providing opportunities around the globe.

The opportunity to invest in Britain is one that has recently been getting attention elsewhere, too. Most notably, Stanley Druckenmiller featured his British investments in his annual video interview [3], which went viral. The hedge fund billionaire was George Soros' sidekick when their Quantum Fund famously made GBP 1bn by shorting the British Pound in 1992. Their judgement about Britain's weakness at the time turned out spot-on, and Druckenmiller as well as Soros became known to have pulled off "the trade of the century".

Today, Druckenmiller is on the other side of the game. He has gone "long Britain" and "long Pound". In his high-profile video interview about his personal investments, he stated:

"I think this (Brexit) is actually going to be very good for the British economy. I separate myself from most on that. I think Boris Johnson is sort of a smarter version of Trump, without some of the antics to go along with it. I would expect investments to fly into that country. I think they'll do very well there."

My website had started tooting the horn for British stocks starting in August 2019. That month also marked the turning point for British stocks. My other two favourites from Britain are also both up already (but should also have further to run, as my Members will have read in a report update that I sent them about one of them earlier today [4]).

Not only do I believe that IAG is one of the most surprising investment finds of the year. It's also a model case how the market sometimes misprices attractive assets. Right now, we are living through an extraordinary period of politics influencing some stock prices, which has led to bargains galore on the London Stock Exchange. You cannot have a view about British stocks without having a view about the seismic political changes happening in this country. Needless to say, I do have my own view about this subject, too. I am bullish for Britain.

I expect that in a few years, investors will look back at today's stock price of IAG (or many other British stocks) and wonder how it could have ever been so cheap.

Now that I have concluded my set of three British stocks, I am looking elsewhere again to find the next such bargains for my readers. More such reports are coming the way of my Members soon. Although I can guarantee that for the next one, I will definitely not share the name publicly. The two ideas I am currently working on for forthcoming reports will be strictly Members-only, because the market will not be as liquid as in the case of IAG.

As it happens, I took a flight yesterday to do some on-the-ground research on one of these opportunities. Needless to say, I left via Heathrow, and BA earned good money off my ticket. Knowing what I now know about this entire industry, I viewed the airport and my experience in an entirely new light!

Did you find this article useful and enjoyable? If you want to read my next articles right when they come out, please sign up to my email list [5].

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