Momentum or recovery? It’s a recurring dilemma facing investors and it will be no different heading into 2025.
Take British Airways and Guinness - two of the best-known brands in Britain, but the stock market fortunes of their respective owners over the past twelve months could not have been more different.
Shares in International Consolidated Airlines Group SA (LSE:IAG), owner of British Airways and a clutch of other big airlines, are at their highest point for almost four years, while Guinness owner Diageo PLC (LSE:DGE) has been hit hard by falling sales of premium spirits in the US market.
So going into the New Year, which is the better bet - the one with all the momentum or the one that could stage a recovery or, taking a leaf out of the sports pages, who will win the IAG derby in 2025: D- IAG-eo or the BA owner.
Has IAG peaked
Leading city house Deutsche Bank has strong views on both
IAG first. Just a fortnight ago, analysts at the bank lifted their rating on the British Airways/Iberia/Vueling owner from a ‘hold’ to a ‘buy’.
Deutsche Bank noted capacity constraints on transatlantic flights should leave IAG well able to lift prices into 2025.
“This is supported by early evidence from our fares tracker and underpinned by the macro outlook for the US, the UK and Spain,” analysts said.
Lower fuel costs should also act as a tailwind over the coming year, leaving scope for ahead-of-consensus earnings growth, according to the bank.
“We think the journey towards a better BA has only just begun,” Deutsche continued.
“Improvements at Aer Lingus, the continued leveraging of the Spanish platforms and growing IAG loyalty should also help.”
A 400p share price target was set, against 215p previously, which compares with 302p today.
A risk is the supply chain issues that have dogged plane maker Boeing (and more recently Airbus) over the past year. Something that industry trade body IATA highlighted a fortnight ago.
“Aircraft deliveries have fallen sharply from the peak of 1,813 aircraft in 2018,” it said.
“The estimate for 2024 deliveries is 1,254 aircraft, a 30% shortfall on what was predicted going into the year.
“In 2025, deliveries are forecast to rise to 1,802, well below earlier expectation for 2,293 deliveries with further downward revisions in 2025 widely seen as quite possible.”
The flip side is that planes fly fuller (the load factor is higher) and if demand is high prices can rise to offset the cost of flying older aircraft.
And on the demand front, there seems little to hold airlines back.
Heathrow, BA’s home airport, has enjoyed its busiest ever year with Christmas set to be a record.
JP Morgan is another fan, describing IAG as the standout in the sector in a December note where it also upgraded rivals easyJet (to 750p) and Ryanair (to €25).
Sectorwise, freight volumes are set to weaken but airlines should be insulated and get an earnings boost from the fuel tailwind and resilient pricing sustained by “a benign demand-supply balance”.
IAG especially should benefit from these trends, suggests the bank.
“It is the most compelling of its overweight airline recommendations due to solid pricing and strong free cash flow that should lead to shareholder cash returns with a re-rating potential.”
Diageo is all about trough and recovery
No one is writing about Diageo in these terms currently.
In its case, it's more that it has great brands [Johnnie Walker, Smirnoff, Guinness] and will recover but 'we are not sure when'.
Deutsche Bank spelt out Diageo’s problems in a very prescient note a year ago and has been a seller ever since.
Spirits demand in China is a worry with the potential for import tariffs a “direct downside risk,” it said recently.
A “trend towards temperance” meanwhile might be a headwind to volume growth for Spirits and Beer alike.
“In addition, [in the US] trade up appears to be on pause with trade down evident in Spirits.”
Its share price target for Diageo was cut slightly to 1,970p from 2,000p.
UBS and Jefferies, in contrast, are on the recovery side of the debate.
Swiss bank UBS gave the spirits group a double upgrade recently to a 'buy' on the basis it will sell strong growth in areas such as tequila.
True, it admits 2025 will be tough, but it sees the US cycle as near the bottom and once it turns Diageo can again see spirits grow by 3% a year. Its price target is 2,920p against 2,511p.
Jefferies, meanwhile, is pinning its hopes on new finance chief Nik Jhangiani, who has joined from Coca-Cola EuroPacific.
The coke bottler has achieved total shareholder returns of more than 200% since 2017, notes the US bank, due to “consistent delivery across top-line, bottom-line and capital efficiency”.
“Our upgrade is not about trying to precisely time the cycle; however, the data is not getting worse and destocking is largely complete.
“The market debate is that lack of growth is structural; our view is that it is cyclical and 2025 represents the trough.”
February interims from the drinks group will be key, says Jefferies, and by that time whether it is momentum or recovery that will win this year’s ‘IAG derby’ should be much clearer.