BROKERS’ NOTES: Buy International Airlines Group, sell Meta Platforms

Nick Kunze, senior portfolio manager: Sanlam Private Wealth

Buy: International Airlines Group (IAG)

IAG is a UK-based airline company, better known as the holding company to British Airways. The company’s segments also include Iberia, Vueling, Aer Lingus and IAG Loyalty. Last week it reported impressive results, showing strong demand across all its airlines that has driven higher revenue and increased operating profit in the first quarter of 2024. Yet valuations are still cheap. Across the whole European airline sector, companies are trading at a discount to their historic multiples. On a forward p:e of 4.5, IAG trails its pre-pandemic five-year average by about 30%. These lowly valuations look out of sync. As long as demand remains resilient, as it is, this should support higher ticket prices. Since the pandemic, balance sheets have strengthened, earnings have largely recovered and many legacy carriers are at or near investment grade. The stock appears too cheap given all these facts and should provide an underpin to the current share price.

Sell: Meta Platforms

Meta Platforms (Facebook) builds technology that helps people connect and share, find communities and grow businesses. Recently, it’s taken a monster bet on AI. A few weeks ago, Meta reported revenues that jumped by more than a quarter in the first three months of the year, beating expectations. But its forecasts left Wall Street underwhelmed and the shares got hammered. The problem is that investor tolerance for extravagant corporate spending on AI is showing signs of fatigue. Meta shareholders were willing to back Mark Zuckerberg’s AI ambitions when the company’s advertising business was cooking, costs elsewhere were coming down and cash was being handed back. But even with billions of dollars pouring in, it is still not clear what sort of AI company Meta is building. It doesn’t sell the chips it designs or the generative AI model it builds, which is open source. Meta stock is up 104% over the past 12 months and up 32% year to date. On a current p:e of 27 and a forward p:e of 24, the stock is fully priced.