Here’s one quality stock that’s flying under the radar

Sometimes, taking a contrarian view and investing in a group of stocks others won’t even consider can turn out to be a very profitable strategy in the long term. Thanks to the uncertainty surrounding Brexit, air traffic control strikes and the ongoing threat of terrorism, companies in the airline industry arguably fall into this category.

One stock I think has been unfairly dragged down by the market more than most is FTSE 250 constituent Wizz Air (LSE: WIZZ) – the largest low-cost airline in Central and Eastern Europe. Back in June, its share price hit 1,995p. At the time of writing, you can snap up the shares for just 1,556p. And, given today’s interim results, that’s exactly what I’m tempted to do.

Flying high

Contrary to what you may suspect, the last six months have been great for the Geneva-based airline. Total revenue increased by 10.1% to €921m with ticket revenues up 4.1% to €567m. Passenger numbers also rose 17.4% to 12.5m. For me, however, the standout number this morning was the 12.5% increase in underlying profit after tax. At €231.6m, this was a record for the company. 

Perhaps more important for those already invested was the company’s reassuring statement that it hadn’t seen any weakness in demand in its UK business as a result of June’s referendum result. Indeed, in addition to reconfirming its full-year guidance, CEO Jozsef Varadi said: “We remain highly committed to the UK market and continue to deliver double-digit growth on our UK network. Nevertheless our highly diversified network enabled us to quickly absorb capacity we reallocated in reaction to the weak sterling following the Brexit vote.”

For me, Wizz Air’s lack of dependence on the UK could mean its shares prove more resilient than others both before and after Article 50 is triggered.

Quality going cheap

Of course, one set of decent results doesn’t an investment case make. Before buying a slice of any company, it makes sense to check its fundamentals and how its shares are currently valued. Here, I like what I see.

As a company, Wizz Air generates high levels of return on the capital it invests. Indeed, its most recent figure (25%) is higher than that achieved by rival low cost carriers easyJet (21%) and Ryanair (18%). Operating margins are decent at 15% and higher than those achieved by easyJet (14%). Furthermore, its net cash position means Wizz Air’s balance sheet looks staggeringly robust, which can’t be said for some airlines. 

The temptation to invest grows even stronger when valuations are considered. Shares in the £905m cap currently trade on attractive forecast price-to-earning (P/E) ratios of just 9 and 8 for 2017 and 2018 respectively. Estimated price-to-earnings growth (PEG) ratios for the next two years are also favourably low at just 0.93 and 0.68. Anything less than one on this measure suggests that a stock may be undervalued given its earnings performance. The forecast yield of 2.6% pencilled-in for next year might be modest but it’s still far more than you’d get from any savings account at the current time.  

So Wizz Air ticks a lot of boxes. In my opinion, a quality company delivering strong revenues and growing profits in a thoroughly competitive industry at a challenging time is one that warrants attention.