Earlier this week, British Airways owner International Consolidated Airlines Group (LSE: IAG) hit the headlines when Brussels warned that the airline’s plans to keep its planes flying across Europe after Brexit were not satisfactory.
IAG uses a complex ownership structure to manage its interests in airlines across Europe, where local companies hold influential stakes in its European carriers. Management had believed that will be enough to meet European rules on airline ownership. To retain flying rights across Europe, airlines have to show that they are more than 50% EU-owned and controlled.
Setback
The news from Brussels is a setback for the group, but it’s not the end of the world. It still has time to buy out UK shareholders to manage the ownership percentage in the event of a messy divorce.
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Personally, I think this uncertainty provides a great opportunity for long-term investors. At the time of writing, IAG shares are trading on less than six times next year’s earnings, one of the lowest valuations the market has ever placed on the shares. This tells me there’s already plenty of bad news factored into the share price. But more importantly, it also seems to suggest that the market is assuming the worst case scenario for IAG, the grounding of its European fleet.
There’s a small chance that this scenario could still play out. However, losing access to Europe won’t be terminal for IAG as the government has already signed an openskies agreement with the United States, which means that no matter what happens after Brexit, IAG will still be able to operate its profitable New York routes.
So, while IAG’s outlook is far from certain, I think the market is overlooking the positives here, and any improvement in IAG’s fortunes could result in a big jump in the share price. A dividend yield of 4.9% only sweetens the deal.
Well prepared
Another FTSE 100 stock I think is trading too cheaply today is 3i Group (LSE: III). At the time of writing, shares in this enterprise are trading at a forward P/E of 6.8, that’s just under half of the FTSE 100 average.
As a private equity vehicle, I think it’s better to value 3i on the net asset value of its holdings rather than earnings, which tend to be lumpy and unpredictable. On this basis, the shares are trading at a price to tangible book value of just 1.1. This isn’t particularly cheap. But at the same time, I think it undervalues the group’s prospects because 3i is better positioned than most to take advantage of any post-Brexit disruption.
The business has generated tens of millions of pounds in value for investors over the past decade by investing in struggling companies and then helping to turn them around.
In a recent trading update, management told shareholders that it believes “careful asset management and clear strategic focus” leaves the portfolio “better positioned than in the past.” What’s more, the team at 3i think its strong balance sheet will help it “withstand market turbulence.“
Considering the above, if you’re looking for a well-funded blue-chip stock with a history of generating value for shareholders to add to your portfolio and ride out Brexit uncertainty, I highly recommend taking a closer look at 3i.
