When demand is softest for a quality company’s product, and prices have sunk, that’s when a FTSE 100 bargain stock is most easily found. I think there’s definitely a bargain in the IAG (LSE:IAG) share price.
The principles of value investing that made Warren Buffett the billionaire he is today lie in finding good companies facing short-term weakness.
So it’s ironic that Buffett went against 25 years of his own warnings to avoid airline stocks and hoover up positions in 2016. The Berkshire Hathaway CEO took stakes in United, American Airlines, Southwest, and Delta.
That contrarian move paid off as the holdings swelled to $4bn in value by the end of 2019. Then the pandemic hit. An entire industry ground to a halt almost overnight. Buffett admitted a rare slip up and sold them all in April 2020 for a substantial loss.
But I think, for once, the Oracle of Omaha moved too soon.
IAG share price to fly?
Let’s look at the headwinds facing the IAG share price today. The parent company of British Airways, Iberia and Aer Lingus revealed a monumental Q1 2020 operating loss of €535m. Compare that to a €135m profit last year.
There are other issues.
CEO Willie Walsh is stepping down after nine years at the helm. It’s perhaps no surprise the former pilot and Irish business magnate decided to fly off into the sunset as the company faces the toughest period in its history.
Iberia CEO Luis Gallego has been promoted up to the top spot and will take up the post on 24 September. Before that, 2020’s half-year results are due out on 31 July and we can expect more short-term pain.
The industry thinks passengers will return in mid-July at the earliest, and even then in a trickle, rather than a flood.
I’d still urge you to recall Benjamin Graham’s famous mantra. “The value investor is a realist who buys from pessimists and sells to optimists.” Optimism is in short supply for airlines right now.
Liquidity gold
I’m looking at the IAG share price for a medium-term recovery with great pedigree. Certainly a price-to-earnings ratio of 2.5 is crazy low. Especially for a company that turned over €25bn in 2018.
Prices change a lot more often than company value. Do I really think the company’s long-term value fell by 65.2% from 19 February 2020 to 19 March 2020? Not a chance. But that’s what the share price says.
Revenue and earnings per share grew every year from 2013 to 2018. Not a sign of a business in trouble. There is one concern though: could IAG go bust? Bosses think it will be 2023 before passenger numbers return to pre-Covid-19 levels. And City analysts expect 2020 to be a shocker, but for the carrier to return to net £1bn profit by 2021.
So let’s look at the balance sheet. Is it robust enough to take an epic earnings hit? Cash burn is high. British Airways alone got through £178m a week in May, operating only 485 passenger flights.
But in my view, IAG’s €10bn of liquidity in the form of cash, loans and cash equivalents puts it in a much better position than its peers.
Don’t get me wrong. The IAG share price is definitely a buy for the brave contrarian. But flying in the opposite direction to the herd could yield the best investing results of your life.
