The price-to-earnings (P/E) ratio of the FTSE 100 is 16.2. When seeking good value, some could screen for FTSE 100 stocks with a below-average ratio. In theory, this could represent a company that could rally over time back to a fairer value. So should I buy these two options that are well below average?
A new rates regime
First up is NatWest Group (LSE:NWG). With a P/E ratio of 9.02, it certainly gets a tick in that box. This comes even with the stock up 19% over the past year.
I think part of the valuation gap relative to the rest of the index still comes from lingering concerns about the low-interest-rate environment we had at the start of the pandemic. With such low rates (almost at zero), it was hard for the bank to make net interest income. However, that has now changed, and interest rates could even get hiked further this summer!
It’s true that an ongoing risk is that the market applies a permanent discount to traditional banks because of regulatory pressures and political uncertainty.
Yet after years of restructuring and cost-cutting, NatWest has become a much simpler business, with a strong position in UK retail and commercial banking. One reason why I think the shares may appear attractive is the bank’s ability to generate consistent profits from its large customer base. In the Q1 results, it had an “attributable profit of £1.4 billion and earnings per share of 17.9 pence, up 15.5% compared with Q1 2025.” More than that, it said that across the customer base it was seeing “healthy customer activity”. This bodes well going forward.
If interest rates remain higher than the ultra-low levels seen for much of the previous decade, NatWest should continue to benefit.
Flying higher
Another idea is the International Consolidated Airlines Group (LSE:IAG). It has a P/E ratio of just 7.28, with the stock up 43% in the last year.
I believe it’s an interesting example of a company where investor pessimism may have created an opportunity. The owner of airlines including British Airways and Iberia has historically traded at a discount because airlines are viewed as cyclical, capital-intensive businesses with unpredictable profits. However, that negative perception may overlook how much IAG has improved its financial position and how powerful the recovery in travel demand has been.
For example, recent Q1 results showed a strong start to the year, with operating profits jumping 77.3% to £302m (ahead of expectations) on a 1.9% rise in revenue to £6.05bn. Aside from just having fuller planes, it was also driven by higher ticket prices. Impressively, net debt was reduced significantly by £1.55bn, down to £3.62bn.
The longer we see the company impress on earnings calls, the less likely the stock is to remain cheap for much longer. That change in sentiment could push the share price higher.
However, investors should not ignore the risks. Airlines remain vulnerable to fuel price increases, especially as we’re seeing at the moment with the spike in oil prices. Competition from low-cost carriers continues to pressure pricing. But overall, I think IAG, along with NatWest, are both cheap FTSE 100 options for investors to consider.
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Jon Smith has no positions in the shares mentioned.
