The IAG (LSE: IAG) share price looks cheap, compared to its trading history. However, while the stock might look cheap, the company’s underlying fundamentals are not that great.
The coronavirus pandemic decimated the firm’s balance sheet, and now management is having to deal with the geopolitical crisis engulfing Europe.
Still, even after considering these factors, the outlook for the business is starting to improve. And considering its current valuation, I think there is an argument to be made that the IAG share price does offer fundamental value at current levels.
FTSE 100 opportunity
I should make it clear that when I say I think the IAG share price offers value, I mean I think the stock looks cheap compared to its potential over the next five-or-so years.
This is a not a trade for the next few months, or even the next year. IAG may take years to recover from the pandemic. And there is plenty that could go wrong in the meantime.
Nevertheless, if sales can recover to pre-pandemic levels, the stock looks cheap compared to its international peer group.
In 2019, the British Airways owner reported total revenues of £21.2bn. Many of its peers are trading at a price-to-sales (P/S) of around one. Therefore, if the company’s sales return to 2019 levels, I estimate the stock could be worth around 30% more than its current price.
There are a lot of assumptions going into this figure. So I do not think it is entirely reliable. However, I believe the figure illustrates the company’s current undervaluation compared to its potential.
IAG share price comparisons
Even if I assume the stock is undervalued by 30%, I do not think it is the cheapest opportunity in the FTSE 100. The company might have to deal with plenty of potential risks over the next few years. These could hold back growth.
By comparison, a number of other FTSE 100 corporations, including the consumer goods champion Unilever, seem to have brighter prospects.
Unlike IAG, this company has a stronger balance sheet and much more control over its international supply chain. The market has been selling the stock recently due to concerns about rising costs in its supply chain. But management believes it can work through these issues by increasing prices.
Compared to the airline group, I think Unilever has brighter prospects and looks cheaper when considering its potential over the next five years.
The bottom line
Overall, while I think the IAG share price does appear cheap, I do not believe it is the best opportunity in the FTSE 100.
That said, I would be happy to buy a speculative position in the company for my portfolio. As a recovery play, I think it has potential.
However, I am not going to be buying a full position until there is more clarity on the long-term outlook for the aviation industry.
