Is the IAG share price still cheap enough to buy?

The IAG share price has soared since November. Roland Head reviews the latest numbers and explains why he’s not buying this reopening stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The International Consolidated Airlines Group (LSE: IAG) share price has doubled since November. However, the stock didn’t move on Friday morning after the airline group announced a first-quarter loss of €1.1bn.

The share price reaction tells me that today’s result was in line with expectations. Losses were expected and the market is happy to look ahead to the reopening trade. I reckon airlines will make a good recovery over the next couple of years. With a return to holiday flying seemingly on the horizon, should I be buying this stock for my portfolio?

The story today

IAG says that passenger capacity during the first quarter was less than 20% of 2019 levels. In other words, the group — which owns British Airways, Iberia, and Aer Lingus — is flying roughly one in five of the flights it operated in 2019.

Forecasts for April-June suggest that passenger capacity will increase to around 25% of 2019 levels. Understandably, CEO Luis Gallego is calling for governments to relax flying restrictions.

Mr Gallego says he’s “absolutely confident that a safe re-start to travel can happen”. But for this to be possible, governments need to set up travel corridors and scale back costly quarantine and testing regimes.

I can imagine his frustration. But what’s interesting to me is that the market is already valuing IAG at pre-pandemic levels.

IAG share price: higher than it looks

A quick glance at the IAG share price chart tells me that the stock is changing hands for about 205p as I write. In early January 2020, the price was 625p.

From looking at these two numbers alone, it might seem like IAG is still cheap enough to be a strong recovery buy. However, these numbers don’t tell the whole story.

In September last year, IAG raised €2.7bn by selling 3bn new shares in a rights issue. This took the group’s total share count from 2bn to almost 5bn.

The company has also increased its borrowing over the last year, to make up for lost income.

Adding together the value of all IAG’s shares and its net debt gives me the company’s enterprise value. This metric is often used to value businesses for sale.

My sums tell me that IAG’s enterprise value today is about £20bn. In January 2020, it was around £16.5bn. So IAG is more expensive today than it was before the pandemic.

What I’m doing now

IAG has made some changes that could help it become more efficient and profitable in the future. British Airways has retired its fleet of 747s, for example. These older aircraft use more fuel than modern long-haul airliners.

However, forecasts from the air industry body IATA suggest that air traffic levels won’t return to 2019 levels until 2024. Given this, I can’t see any reason why I’d want to pay more for IAG today than I would have done before the pandemic.

In my view, IAG shares are already fully priced for recovery. I don’t see much upside from current levels, so I won’t be buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »