Are Thomas Cook Group plc, easyJet plc and International Consolidated Airlns Grp SA 3 stocks you need to own?

Updated
Easyjet airplane about to land
Easyjet airplane about to land

Shares in travel company Thomas Cook(LSE: TCG) have fallen by around 19% today after it warned on the outlook for its full-year results. Although the company was able to record a smaller pre-tax loss in the first six months of the current financial year versus the previous year, lower demand for trips to Turkey and Belgium due to terrorism fears have caused it to become more cautious regarding its performance for the remainder of the year.

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Despite this, Thomas Cook is making encouraging progress elsewhere. Bookings to destinations excluding Turkey have risen by 6% versus the previous year, which has helped the company to increase like-for-like (LFL) sales by 0.3% as it anticipated a shift in demand away from Turkey, Tunisia and Egypt. And with gross margins improving by 10 basis points, Thomas Cook appears to have a sound strategy for the long term.

With Thomas Cook trading on a price-to-earnings (P/E) ratio of just 6.8, it seems to offer a wide margin of safety. As such, buying now could be a sound move, although its shares are likely to be volatile as the outlook for the wider airline industry remains highly uncertain.

Dividend growth ahead?

It's a similar story for easyJet(LSE: EZJ), with the budget airline having downgraded guidance for the full-year. It's now expected to record just a 3% rise in earnings as demand for air travel has come under pressure. But with easyJet forecast to return to much stronger growth next year with a rise in earnings of 15%, investor sentiment could improve over the coming months.

That's especially the case since easyJet trades on a price-to-earnings growth (PEG) ratio of just 0.6, which indicates that its shares offer superb capital gain potential. And with easyJet forecast to raise dividends per share by over 15% next year, it's due to yield 5.2%. This makes it a superb income play and as a result of dividends being covered 2.2 times by profit, further rapid dividend growth could be on the horizon.

Margin of safety

Meanwhile, British Airways owner IAG(LSE: IAG) also offers a relatively wide margin of safety. Certainly, it has endured a number of challenging years where the global financial crisis put a significant amount of pressure on its financial performance. However, after making a loss in 2012, IAG has recorded strong profit growth and in the next two years it's forecast to continue this with an increase in its bottom line of 49% in the current year and 13% next year.

Allied to this strong growth rate is a dividend yield that's forecast to be as high as 4.2% in the current year. Not only does this have the potential to attract income-seeking investors to IAG, but it also shows the confidence the company has in its long-term future after dividends were suspended for a number of years. As such, now could be a good time to buy IAG for the long term.

Certainly, Thomas Cook, easyJet and IAG may see investor sentiment worsen in the short run if terrorism is to blame for the apparent loss of EgyptAir flight MS804, which is currently missing. However, with wide margins of safety on offer, all three stocks could prove to be strong performers over the medium-to-long term.

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Peter Stephens owns shares of easyJet. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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