Cheap S&P/ASX 200 Index (ASX: XJO) shares can be a great source of investment outperformance, if we manage to buy the right ones!
Essentially, by buying businesses for less than they're intrinsically worth, we give ourselves a bigger margin of safety to make pleasing returns.
On that note, I believe right now is a good time to buy the following two ASX 200 shares due to the strength of their operations and the cheap valuations they're trading at.
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Brickworks Limited (ASX: BKW)
Brickworks is one of the largest building product manufacturers in Australia. It manufactures clay bricks and pavers, masonry and stone, roofing, specialised building systems, cement, and timber battens.
What's most interesting to me about Brickworks is its array of property assets and the 26.1% stake in investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Brickworks owns land in its own name. It's the key asset of an industrial property trust held in a 50/50 partnership with Goodman Group (ASX: GMG) and a 50% stake in a manufacturing property trust where Brickworks is the tenant.
The industrial property trust is generating rental profit for Brickworks, and it will continue to grow as more large warehouses are completed.
Brickworks' most valuable asset is its Soul Patts investment. The latter is invested across numerous sectors including telecommunications, property, credit/bonds, financial services, resources, agriculture, and more. This investment provides asset diversification and a growing dividend for Brickworks.
Brickworks had an inferred asset backing of $5.59 billion as at January 2024. Adjusting this to the current market capitalisation of Soul Patts would put Brickworks' asset backing at roughly $5.4 billion. That compares to the Brickworks market capitalisation of $4.05 billion.
I think there's a very sizeable discount here, making Brickworks look cheap to me, particularly considering its industrial property trust is continuing to build more warehouses.
As a bonus, this ASX 200 share hasn't cut its dividend for almost 50 years, so it seems like a solid choice for reliable income.
Qantas Airways Limited (ASX: QAN)
The Qantas share price has seen volatility over the past year, as we can see on the chart below.
With COVID-19 restrictions and related impacts in the rearview mirror, I believe the ASX travel share has a chance to make fairly consistent profits in the years ahead.
In the FY24 first-half result, Qantas reported underlying profit before tax of $1.25 billion and statutory net profit after tax (NPAT) of $869 million. This led to the airline announcing an additional on-market share buyback of up to $400 million.
Qantas was recently hit with a $100 million penalty by the ACCC, but the issue now seems to be resolved, which is a positive. The company's revenue outlook still seems to be strong. In the FY24 first-half result, the airline reported that travel demand remained strong across all sectors, with leisure continuing to lead the way and business travel now approaching pre-COVID levels.
The Qantas loyalty division is targeting underlying earnings before interest and tax (EBIT) of between $800 million and $1 billion by FY30, which could significantly boost Qantas' overall earnings.
Broker UBS suggests Qantas could make earnings per share (EPS) of 91 cents in FY24, 92 cents in FY25, 90 cents in FY26, 99 cents in FY27, and $1.11 in FY28. This would put the Qantas share price at under 7x FY24's estimated earnings and at just 5.5x FY28's projected earnings. I view those earnings multiples as low.
I think this could be a good time to invest in this cheap ASX 200 share while it's hurting from negative coverage.
