IAG (LSE: IAG) shares have plunged in value over the past few weeks. It’s easy to see why. Travel bans, introduced to contain the spread of the coronavirus, have forced IAG to ground the majority of its global fleet.
However, unlike other airlines around the world, IAG seems confident that it can weather this crisis.
With this being the case, could now be a good time for bargain-hunting investors to snap up IAG shares?
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IAG shares: well prepared
According to recent trading updates from the company, IAG believes that it is well prepared to withstand an extended period of disruption.
The group is going to reduce capacity by at least 75% in April and May. It is also looking to furlough around 35,000 employees in the UK according to reports. All non-essential spending is being cut, working hours are being reduced, and surplus aircraft have been grounded.
These efforts to cut costs will have a positive impact on IAG’s financial position. At the beginning of March, the group had cash equivalents and interest-bearing deposits of €7.4bn. On top of this, financing facilities of €1.9bn are available. That gives IAG €9.3bn of total liquidity.
A quick, back-of-the-envelope calculation suggests that this could be enough to help the company pull through.
Last year, the company recorded total operating costs of around €20bn. On that basis, IAG has enough capital to last for at least six months. That’s excluding the group’s efforts to cut costs. These efforts could support IAG shares.
With 75% of the company’s fleet grounded, costs could fall by a similar amount. In this situation, it would appear that IAG has the financial resources to survive for at least a year in the current situation.
Undervalued
All of the above suggests that the chances of the airline group going out of business are small. As such, IAG shares could be an attractive investment for risk-tolerant investors.
Analysts were expecting a company to earn around 101p for 2021. On that basis, assuming the organisation returns to its full schedule next year, the stock could be trading at a 2021 price-to-earnings (P/E) ratio of just 2. That’s compared to the historical average of around 6.
So, in the best-case scenario, the stock could rise by more than 200% from current levels.
That being said, as it is difficult to tell what the future holds for the global economy and the global airline industry at this stage, there’s no guarantee the company will be able to return to growth in 2021.
Therefore, IAG shares are only really suitable for the most risk-tolerant investors at current levels. If the economic disruption from the coronavirus outbreak lasts for more than 12 months, the company could run into some severe financial difficulty.
In this worst-case scenario, there’s no telling how long the business could last and what shape it would be in when the situation resolves itself.
If you can’t live with that uncertainty, it might be better to look elsewhere for value.
