This FTSE 100 stock still looks ludicrously cheap

Shares in British Airways, Iberia and Aer Lingus owner International Consolidated Airlines(LSE: IAG) hit a fresh bout of turbulence this morning as the shares dived following the publication of its latest set of interim numbers and news that the FTSE 100 company had suffered disruption costs as a result of strikes by French Air Traffic Control.

If you ask me, this just made the stock even more attractive than it already was. Let me explain.

Growth AND income

Taken on their own, the numbers were solid (despite being slightly below consensus estimates).

Total revenue rose 3.1% over the first six months of 2018 to EUR11.2bn. Operating profit after exceptional items almost doubled to EUR1.74bn from EUR873m the year before. In addition to non-fuel unit costs before exceptional items falling 2% at constant currency over the last quarter, adjusted net debt also fell almost 12% to EUR6.2bn.

Positively, IAG also stuck to previous guidance. Despite the aforementioned strikes and rising fuel costs (the latter increased 15% at constant currency over Q2), IAG still thinks it will post a rise in FY operating profit with passenger revenue and non-fuel costs also expected to get better once foreign exchange fluctuations are taken into account.

As well as sticking to its guns, CEO Willie Walsh stated that IAG was "committed to accelerating" the growth of the company's budget airline LEVEL by increasing its fleet in Paris and Barcelona in 2019. This follows on from the recent launch of short-haul flights from Vienna to 14 destinations in Europe, thereby allowing it to compete with the likes of easyJet and Ryanair.

Before today, IAG's shares were changing hands for under 7 times forecast earnings. This just looks far too cheap to me, despite the hugely competitive industry in which the company operates. Moreover, the forecast 3.7% dividend yield, while not among the largest on offer in the FTSE 100, is likely to be covered almost four times by profits, suggesting there's a high chance of further double-digit hikes to the payout going forwards.

On the cheap

For those less concerned with receiving income from their investments, I think online travel agent On the Beach(LSE: OTB) is another top pick for those wishing to add a leisure-related holding to their portfolios.

Despite registering stellar trading for a few years now, the stock has fallen out of favour with investors over recent months, perhaps as a result of the superb weather we've had in the UK and the assumption that many families will have opted for staycations. Since May, the value of the Stockport-based business has fallen almost 35% -- a reversal of fortunes for investors who've seen the share multi-bag since hitting post-EU referendum vote lows of 176p.

Personally, I see this as a blip on what remains a compelling growth story. Beach holidays abroad won't suddenly become unpopular on the basis of one period of exceptional weather. Nor will Brexit spell certain doom for operators in this industry, particularly those who already have a decent share of the online market (which On the Beach does).

So, having once profited handsomely from the stock, I'm starting to get interested again. Although expectations may be revised after the company next reports to the market, the valuation of 20 times earnings for this year, reducing to 16 in 2018/19, is starting to look reasonable for a company with a PEG ratio below one.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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