Fundamentally Furloughed

Very interesting, I did look at Ebay, though it was quite a few months ago now, and also decided not to buy as the growth wasn’t there.

Would agree that Atlassian could be an interesting one

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Thanks again everyone for the great feedback! I’ll have a think about what to review today. I’m tempted to pickup a UK firm as I haven’t covered one in a while, though more frequent financials make US firms easier!

As always hope everyone is staying safe and thank you for taking the time to read all my posts! It’s definitely being better received than I could have imagined and it’s really encouraged me to learn more about stock analysis!

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It’s us that should be thanking you. Possible side hustle for a few extra ££’s when you’re back at work?

Great job. :+1:

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Burford Capital?

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I’ll add it to my list!

I’ve started looking at an interesting company, just reading through all the reports now! Hopefully I’ll get everything researched and written in a few hours :timer_clock:

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British Airways (IAG) about to take off?

International Airlines Group (IAG) the owner of British Airways, Aer Lingus, Iberia, and two other retail transport airlines, a cargo business, a loyalty program, and finally a dedicated restructuring and business transformation arm. Is my focus right now seeing how COVID-19 has spelt serious trouble for the group.

Even now we are seeing the UK government call out IAG’s actions relating to how they are coping with COVID-19.

iag logo

Is IAG In Trouble?

Yes is the short answer. Supposedly the group is burning £20m a day with almost no revenue generation from the airline groups. Cargo, loyalty schemes, and business operations are still in full swing but this was never the big-ticket revenue generators.

That said there also aren’t going to be falling off the radar any time soon. Two weeks ago one of the owned IAG brands has brought out a competitor, a move which has attracted a lot of negative press due to their increasing dominance and seemingly inconsistent approach to how the airlines are doing. BA is firing its staff and rehiring them on cheaper contracts, while Iberia is buying competitors.

It’s this dynamic of moral issues, a damaged industry, the CEO stepping down in September, and a global pandemic which has made me want to look at IAG as a shorter-term investment opportunity.

Is IAG Fundamentally Strong?

We only have the Q1 figures to go off and any announcements IAG has made to build up a picture of IAG life during COVID-19, which they have clearly been as light as possible on.

iag passengers
Source: IAG Q1 2020 Traffic Report

We know that flights have been grinding to a halt, domestic and international travel has been restricted or blocked. However, without a Q2 report, we don’t have any official insight into the impact. Given the massive cutbacks and use of government support, we know the impact is single biggest threat IAG has faced in its nine-year life.


Source: Genuine Impact

While the surface figures don’t look alarming, we are dealing with fundamentals which don’t include the current impact, the only dynamic bits to the company assessment is the current price and latest analyst ratings.


Source: IAG Q1 2020 Report

Looking at the annual figures IAG was brining in around €25m a year in revenue with a profit margin bouncing between 6-11%, 2016 and 2017 saw 8.56% and 8.69% respectively with 2019 dipping to a low of 6.72%. If you look at Q1 we even saw a -36.71% profit margin for a three month period where we had one a bit good months of travel.

It’s no secret that airlines struggle with profitability. With a gross margin of 28.48% in their 2019 full-year statement, that doesn’t leave a lot of wriggle room. Not to mention the pilling debt which has no doubt taken a serious turn for the worse.

In 2019 we had 80.85% debt to assets, with €12.7m in current liabilities. Even in that report the current assets only came to €11.3m. The biggest asset IAG has is it’s fleet and sites, coming in at €19.1m, however, the planes need maintenance and ongoing expense and the sites are only useful for other aerospace firms or Top Gear. The point is I don’t have a lot of faith in these long term assets being worth as much as the balance sheet claims.


Source: Wallmine

With increasing debts, lower profits, and an increase in financing, even without COVID-19 this wasn’t the healthiest looking firm. Then why was this one of the hot stocks, and why is it making a comeback?


Source: Google Finance

News that flights would reopen gave the stock a recent boost, but firing their staff and rehiring them, as well as the UK governments isolation after travelling plans have restricted any upward momentum.

The value metrics are all very misleading, firstly we have had a negative quarter, the liabilities and assets are assumed to remain the same, and even looking annually we aren’t accounting for what could be three or more heavily negative quarters.


Source: Wallmine

While IAG is losing money I’m not expecting this dividend to be flowing, but once we get into a more stable position this will be a big attraction for other investors. Assuming that IAG isn’t going to fail within the next year, the company is taking steps to payout to shareholders in the long term.


Source: Genuine Impact

The sell-side analysts are also pretty punchy in terms of IAG’s future. They can raise and manage more debt and can increase profitability by making the cuts which they have been performing over the last month or so.

I’m not surprised to see strong support by analysts, and even a consensus share price target of £4.2781, compared to the current price around £2.70~.

Summary Pros

  • IAG can generate large profits and is geographically spread out
  • Buying up competitors while the market is cheap
  • Taking full advantage of government support in multiple regions
  • Already gone through the painful shrinking process
  • The market is eager to invest back into the firm once travel restrictions are lifted
  • Big dividend to tempt in other investors and give them confidence, producing more momentum

Summary Cons

  • Growing debt and the new state of debt is unknown
  • Very fragile and reactive to COVID-19 news
  • Collecting a large amount of bad PR
  • Growing size could attract government attention, especially if they need more government assistance

My Thoughts

Right now I am looking at IAG as a huge momentum play. News of the 14-day self-isolation in the UK and around the EU being eased would be a massive boom. I think fundamentally the airline industry is a tough sell, and coming out of COVID-19 is going to leave a stain on their balance sheets for the next couple of years.

I am intending to buy into IAG and set myself the £4.00~, just under the sell-side estimates. If we can hit that price point in the next three months and the price begins to wobble again, I’d be happy to sell out and put my cash elsewhere.

Best case we see a closer return to old figures, but I don’t see that happening once we see the state of the new debt. It would be overwhelming momentum and lighting in a bottle moment if we saw the £5 mark within the next six months.

Let me know what your thoughts are on IAG? Is this a company you are invested into, or one you have been watching? As always I love to hear your feedback!

Thanks for reading and stay safe.

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Loving the layout towards the end. Great work as always.

I’m erring on the side of caution, following Mr. Buffett’s US airline’s dump.

Cannabinoid companies? Have you analyzed one yet?

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Not yet, it’s an industry I haven’t touched at all honestly. Something for me to read up on! :nerd_face:

+1 for the title

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That’s where the real effort has been going lately :laughing:

Start only reviewing stocks I can think of a pun or witty title for.

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EssilorLuxottica SA

One of my favourite companies in the world. Not on Freetrade yet.

Business model is lovely. Exclusivity deals all over.

Feel free to check it out

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Really interesting, thanks for the tip!

Looks like a few analysts are still pushing for a buy, a few holds, and one sell. Decent analyst coverage at least!

They also have a really strong ESG rank which is interesting.

Never looked at them before, looks like a pretty stable firm. They are on the Paris exchange though, don’t you have to pay a foreigner tax for trading French shares? I think that was an issue I had investing in Ubisoft a few years back.

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Check their brands

https://www.essilorluxottica.com/brands

Ubiquitous.

Not cheap.

I don’t know.

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Great summary again. Is this on Free Trade yet?

Couldn’t find it myself

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Amazing! That is a serious collection of brands. I did some quick digging and found a few reports on how they are effectively controlling the glasses market in America. Talk about dominance!

I managed to find the “french foreigner tax”

https://www.youinvest.co.uk/our-services/international-dealing, under the What are the costs heading and image, the final paragraph has a link.

In addition to these charges there are additional government and local stock exchange charges for certain international markets. These charges will be added to your contract note. To view these charges click here

That has the extra fee there. Turns out a few markets do something similar that I didn’t know about!

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I gave it a quick look and it looks like a Freetrade restriction for now.

In short, investing in a UK airline you need to declare your nationality for defence reasons, and that hasn’t been setup yet. Hopefully something they do in the future! This was an extra check I didn’t know happened with some stocks!

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I was aware of it for things like BAE but didn’t know it reached as far as UK airlines as well. The more you know hey

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Make that the world! From what i understand any brand/ celebrity that needs glasses made relies on them to do it. Look at the list of brands on there, any name in glasses and shades is there, including all the high-end names. It’s a monopoly!

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Indeed.

Before the merger with Essilor, Luxottica revitalized Ray-Ban at a time the company was in financial trouble.

Ray-Ban became increasingly popular. Everybody wanted to buy a pair. Management decided to drop prices in order to get a wider customer base, allowing lower income people to be able have a taste. Sales dropped with the lower prices, for the customer now perceives the brand as of lower quality and without the sense of exclusivity. On its knees, they are acquired by Luxottica. Luxottica raises the prices. Sales increase…

Oakley tries to fight Luxottica. Luxottica wins and acquires Oakley.

Essilor merger with Luxottica. Prescription glasses and contact lenses merger with designer shades. Loads of real estate. Loads of R&D investment.

Not only they have a moat around their castle, they have generals, an army and the equipment to overcome challengers. As long as they have consumer psychology on their side, they are winners in their game. Their realm. There are loads of people who like to feel they can afford to pay 150, 200, 300 quid for a pair of shades with a famous name on it so they can show it to everyone else.

Manufacturing costs for the shades: 2 to 3 quid. Per unit.

Love the business.

Love Hawkers shades. A privately owned competitor with a different business model. All they have is a warehouse and a website. Manufacturing costs for the shades: 2 to 3 quid per unit. Retail price: 20 to 50 quid. Much smaller cost structure. A lot less employees and partners needed.

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