Investment View: Don't get flights of fancy over the airlines' shares

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The Independent Online

Wrapping up some of the more prominent companies to update on their financials following the recent torrent of trading statements, let's have a look at easyJet.

Which doesn't make happy reading for me. I last featured the low-cost airline back on 6 July, when the shares stood at 531p. I said take profits, which has been one of the worst calls I've made. EasyJet shares have jetted past 900p and beyond. Ouch.

That's despite the OFT acting to curb the silly game low-cost carriers play by quoting rock bottom prices and then adding on all sorts of extras, like admin and processing fees. Then there's the continued fighting between the company and its founder, leading shareholder Sir Stelios Haji-Ioannou. Which is costing the group its chairman, City grandee Sir Michael Rake.

The announcement of his departure was the reason for the shares' weakness yesterday, when they fell 9.5p to 935.5p. I've said before that Sir Stelios ought to just buy the company back if he's not happy with the way it is being run, although he has raised the right points on some issues (particularly executive pay). Given the surge in the share price, that could now be prohibitively expensive.

The constant sniping with its biggest shareholder doesn't appear to have rattled easyJet's performance. Au contraire. The recent trading statement was given rave reviews by the market, particularly because of the growth in business travellers, which helped drive a 9.2 per cent rise in first-quarter revenues.

As a result, and with about 80 per cent of first-half seats booked, the airline expects to limit its first-half loss to between £50m and £75m. That compares with £112m for the same period last year. Profits come in the much busier second half.

For the year to end September easyJet's shares trade on 12.8 times forecast earnings, with a forecast yield of 2 per cent. It's a company doing well, but that's just a little too rich for my blood given the economic uncertainties, continuing issues with Sir Stelios and the regulators.

I admit to getting it wrong. But I would expect the shares to settle down a bit from here. If you're going to buy, buy on weakness.

I was similarly sceptical about the clumsily named International Consolidated Airlines Group, which is British Airways and Iberian. Well, to be fair, you'ld hardly amalgamate the name into, erm, Briberian.

Its shares, while 3p off at 220p yesterday, have also been flying high. Its health is improving and the combative chief executive Willie Walsh has even managed to get a deal with Spanish unions over restructuring.

All the same, I'm still out of this one. Generally I dislike the sector, for good reasons. If you look back at the record of airlines and what they have provided for investors over the (sorry about the pun) long haul, it's been something of a … well I won't say disaster, but you know what I mean.

The only airline I would be investing in is the same one I advised holding at the time of my last look at this sector: Ryanair. The stock was trading at about €4 then. It's now at €5.56. So my tipping hasn't been a complete loss. I'm in the camp that can't bear its chief executive, Michael O'Leary, or his business practices. But from an investment perspective one can't argue with the results, which again defied expectations yesterday. And even though the shares aren't as cheap as they were, at 15 times earnings but with a sector-leading 3 per cent forecast yield, it's the proven high flyer. It's a long-term hold.

Elsewhere WH Smith continued to follow its path of sales falling but profits (likely) rising. In the 20-week period to 20 January, sales at stores open at least a year tumbled by 5 per cent.

Total sales were down 4 per cent. The declines are accelerating. In the first 10 weeks total group sales were down 3 per cent with sales at outlets open for a year down 4 per cent.

However, Smith's makes good money on what it does sell. It still has shops dotted up and down Britain's embattled high streets, with a visible (and handy) presence at transport hubs. The stores generally are loud and garish and if you try to buy a paper the checkout assistants will push sweets on you, and your kids will be all over the stuff stacked up by the tills.

But margins have held up, costs are on a tight leash and the company says it has further opportunities for growth.

It's hard to argue with the chief executive Kate Swann's recipe for success. She is off in the summer, but her strategy might even see sales heading higher sometime in 2014.

The shares are still not all that expensive, even though at 666.5p they are close to an all-time high. For the year ending 31 August they trade on 9.5 times forecast earnings, yielding a forecast 4.9 per cent. So keep holding Smith's.