Since March, the IAG (LSE: IAG) share price has been following a disappointing trajectory. The aviation industry was hit hardest by the pandemic with a near-global standstill in travel. However, throughout the tail end of 2020 and the start of 2021, things seemed to be picking up. This progress has since reversed, with IAG falling over 23% in the past six months. So, is now a good time to grab some cheap IAG shares? Let’s take a closer look.
IAG share price valuation
The IAG share price is currently sitting at 155p. It’s currently trading off of a price-to-sales (P/S) ratio of 1.63. This is significantly lower than competitors easyJet and Ryanair, who trade off P/S ratios of 4.15 and 9.54 respectively. This shows me that IAG stock may be undervalued at current prices.
A slightly worrying point is that the firm’s enterprise value (EV) has actually increased since before the pandemic. EV is calculated by adding together the firm’s market cap and net debt, showing how much someone would theoretically have to pay to buy the business outright. At the end of 2019, IAG’s enterprise value was about £16.5bn. Today it is just below £20bn. This signals the business is valued a lot higher than in 2019, even though flight numbers and revenues have decreased.
However, this does not worry me. The main reason this number has increased is because IAG added £3.8bn of debt to its balance sheet during the pandemic. This was a theme across most of the aviation industry, with easyJet also forced to take a £1.4bn debt package. TUI followed a similar path, finishing 2020 with over £6.5bn in net debt. The fact that all of these firms will have seen significant jumps in EV makes me believe that the IAG share price may still offer good value at current levels.
Pushing higher
IAG’s half-year results did show some encouraging numbers. Q2 passenger capacity was only 21% of 2019 levels, but this is expected to rise to 45% for Q3. In addition to this, IAG has a strong cash position of £8.5bn. Both of these numbers point towards a rising IAG share price in the near future.
However, many analysts have stated they don’t believe the aviation industry will fully recover until 2024. Many countries like the US, Australia, and New Zealand still have strict Covid-19 travel restrictions. As British Airways makes most of its business from long-haul flights, these continued restrictions are likely to stifle future growth.
Overall, I think the IAG share price offers some good value at current levels. However, this doesn’t mean there is not further to fall. In a few years, I think we could see a good recovery and the IAG share price will be significantly higher than where it is now. In the short term though, I am not convinced this is a buying opportunity.
