Interactive Investor

IAG and easyJet fly high on a good day for airline stocks

2nd December 2021 12:54

Graeme Evans from interactive investor

Despite another bad day for global stocks amid further panic about the new Covid variant, there are some surprise winners in the UK today.

Airline stocks survived more market turbulence today, but Whitbread (LSE:WTB) found itself out in the cold despite more favourable broker comment for the Premier Inn hotels chain.

British Airways owner International Airlines Group (LSE:IAG) rose 2% at the top of the FTSE 100 index, even amid selling elsewhere following the discovery of the first case of Omicron in the US.

IAG's shares were 154.3p prior to the discovery of the variant and closed at 127.5p on Tuesday but have shown signs of resilience in the past two sessions to recover to 134.6p.

It's early days but the travel industry's worst-case scenarios have been offset by the World Health Organisation saying that Omicron cases so far have been mild, and that vaccines should still work. Oil prices more than $10 a barrel lower than a week ago have also helped.

In the FTSE 250 index, easyJet (LSE:EZJ) and Wizz Air Holdings (LSE:WIZZ) climbed 4% in a session when the second-tier benchmark declined by almost 1%. This resilience is good news for interactive investor customers who made IAG, easyJet and Rolls-Royce Holdings (LSE:RR.) among the top six most-bought stocks on our platform in November.

Investors check out of Premier Inn owner

Whitbread shares, however, continue to struggle for momentum despite a second City firm backing the domestic-focused leisure business in the wake of the Omicron sell-off.

Peel Hunt said today: “We understand why Omicron has sparked a travel sell-off but Whitbread is a UK market leader in excellent financial shape with a clear strategy for growth and freehold asset backing. This is the share to buy on a dip, in our opinion.”

The broker has a price target of 3,600p, which compares with 2,863p today and 3,108p on Thursday evening. Shares rallied 3% yesterday but fell back 1% today.

Morgan Stanley's leisure team this week recommended that investors favour companies exposed to domestic rather than international demand and with strong balance sheets.

They noted on Tuesday that Whitbread, railway caterer SSP Group (LSE:SSPG) and Flutter Entertainment (LSE:FLTR) seemed relatively oversold since the Omicron developments, leaving a potential 32% upside for the Premier Inn owner.

Even before the latest disruption, Whitbread shares had underperformed peers including InterContinental Hotels Group (LSE:IHG) to trade 5% lower in the year to date.

Peel Hunt said this record made no sense: “We believe that the UK is on track largely 
to recover from Covid-19.

“Inbound tourism and high-end business travel may be disrupted by the Omicron variant for a 
while longer, but neither are core to Whitbread which depends on essential domestic business travel, and leisure, which are in relatively good health.”

They added that Whitbread has the balance sheet strength to seize growth opportunities in the UK and Germany and the freehold asset backing to attract bid interest.

Another staycation boom?

Whitbread's most recent update in late October showed a stronger-than-expected recovery by Premier Inn, driven by a staycation boom and significant market outperformance in the UK.

It is the UK's largest hotel chain with over 80,000 rooms, but believes there's potential for this figure to grow to at least 110,000.

The independent sector still represents 48% of the UK market and 72% in Germany but are both in long-term decline as customers migrate from independent to budget branded hotels.

Whitbread said in October: “This migration is expected to accelerate as a result of the Covid-19 crisis and Premier Inn is well-placed to capitalise on the expected contraction in competitor supply and to take market share in both the UK and Germany.”

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