Are these the FTSE 100's best bargains or biggest value traps?
Value hunters looking for bargain basement deals in the FTSE 100 will undoubtedly be intrigued by the eye-wateringly low 8.2 P/E ratio of Holiday Inn owner Intercontinental Hotels Group (LSE: IHG). But, is this global hotel giant a screaming bargain or a value trap waiting to be sprung?
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Unfortunately for bargain hunters, IHG is certainly not the incredibly cheap stock its trailing P/E ratio would have us believe. That's because last year's earnings were significantly skewed by $1.3bn of asset sales that won't be repeated in the future. Strip out the positive effects of these sales and IHG shares now trade at a much more pricey 24.9 times trailing earnings. So, IHG won't be any value investor's dream stock, but does that mean shares are necessarily a value trap?
With shares priced for considerable growth, the question becomes whether or not IHG can live up to the high expectations City analysts have set for it. The bad news is that in the nine months to September year-on-year growth in revenue per available room, the key industry metric, slowed to 1.8% on a constant currency basis, compared to 5.1% in the same period in 2015.
The main problem is that the industry has been adding new hotels at a rapid clip over the past few years as economies recovered from the Financial Crisis. But now that macroeconomic growth in key markets such as China and Europe is slowing, hotels are finding supply growth outstripping slowing demand growth.
This is obviously bad news for IHG, but investors can at least console themselves with the fact that management has significantly de-risked operations by selling off hotels it directly owns and transitioning to an asset-light franchised model. Yet this won't be enough to prop up IHG shares should current trends persist in the coming years. With shares trading at a very high valuation and economic headwinds growing I wouldn't be surprised to see share prices give back recent gains in 2017.
Fare wars
A more typical bargain hunter's share is British Airways parent International Consolidated Airlines Group (LSE: IAG). After suffering a 20% drop in prices over the past year, IAG shares now trade at a miniscule 6.4 times trailing earnings while offering a hefty 3.9% dividend yield.
The reason IAG shares have sunk so low is fear that the European airline industry is approaching one of its frequent fare wars as years of adding new planes and new routes runs head first into slowing demand growth. Now, IAG is somewhat immune to these problems as its breadbasket routes are transatlantic ones that budget carriers have been largely excluded from. Instead, IAG competes largely with American carriers that have been much more restrained in their supply growth since the Financial Crisis.
The airline is also quite well positioned to survive any downturn as it has room to cut considerable fat from carriers such as Iberia and Aer Lingus. Trimming operating costs from these, as well as solid cash generation and a healthy balance sheet won't completely shield IAG from any price wars in the industry, but they'll go a long way. The airline industry's cyclical nature will preclude me from buying IAG shares any time soon, but hardy value investors may find the shares an interesting contrarian pick.
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Ian Pierce has no position in any shares mentioned. 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.
