As we head into the final quarter of 2018, I believe the market movements we’ve seen this year have created some bargain buys for income investors — and left us with some stocks that are best avoided.
Today I want to look at one share I’d buy and one I’d sell after recent news. Let’s get the bad news out of the way first.
Strikes prove costly
The share price of budget airline Ryanair Holdings (LSE: RYA) was down by 10% at the time of writing on Monday, following a profit warning.
The firm says that profits for the year to 31 March 2019 are now expected to be between €1.1bn and €1.2bn. This represents a reduction of about 10% from previous guidance of €1.25bn to €1.35bn. Ryanair said that rising fuel costs and disruption caused by strike action are to blame for the cut.
The full cost of repeated strikes appears to be rising. In today’s statement, the airline admits that forward bookings and ticket prices for the final quarter of the year are lower than expected. Understandably, customers aren’t too keen on booking tickets when so many flights are being cancelled.
New EU rules on compensation for passengers left stranded by strikes are also adding to the total cost of the disruption.
Too clever by half?
Airlines shares have fallen after today’s news from Ryanair. This suggests that markets are pricing in an uncertain outlook for the wider sector. But my feeling is that Ryanair’s problems may be due at least partly to chief executive Michael O’Leary’s famously aggressive approach to costs, including staff.
Mr O’Leary complains that strikes are being “incited by competitor employees”. I’ve no idea if this is true. But it does seem that Ryanair crew feel they are getting a worse deal than staff at rival airlines.
Budget rival easyJet (which I hold) confirmed last week that its full-year profits would be in the upper half of previous guidance. This seems to support my view that Ryanair’s problems are at least partly self-inflicted. For this reason, I rate the shares as a sell.
A safer alternative?
My stance on airlines isn’t without risk. If you’re concerned about the impact of rising fuel costs on airline profits, then one alternative might be to consider investing in bus and train operators.
Bus and rail group Stagecoach (LSE: SGC) has lost nearly 50% of its market value over the last three years and now looks very cheap to me. Rising fuel prices could be good news for this firm, as drivers might consider ways to cut down on car usage.
These numbers tell me to ‘buy’
Stagecoach’s cash flow and debt look acceptable to me, but I’m especially attracted to the group’s generous earnings yield of 10%. This ratio compares operating profit with enterprise value (market cap plus net debt). It tells me how much profit a company is making relative to its overall valuation, before interest and tax costs.
One potential concern for equity investors is that analysts are forecasting a 10% reduction in earnings next year.
That’s not ideal, but personally I think this bad news is already reflected in the stock’s modest valuation. Stagecoach shares currently trade on just 8.5 times 2018/19 forecast earnings, with a prospective yield of almost 5%. At this level, I see it as a low-risk dividend buy.