International Consolidated Airlines (LSE: IAG) was soaring earlier in the year. But since a 2021 high in March, the IAG share price has lost 25% of its value.
Perhaps investors have taken notice of my Motley Fool colleague G A Chester’s evaluation of the company. He worked out that IAG’s enterprise value has risen higher than it was prior to the pandemic. That is, if an investor today wanted to buy the whole company and pay off its net debt, they’d have to stump up around £3bn more than before the crash.
But that might mean different things. It could mean that the airline group was undervalued prior to the devastation of its business by the coronavirus. After all, we’ve been looking at very low P/E multiples for years. And as recently as 2018, the 31 eurocent ordinary dividend yielded 4.5% on year-end prices. On top of that, investors got a special dividend of 35 cents, and the company was buying back its own shares.
Should IAG get back to paying 31 cents in dividends, on the current price that would yield a massive 16%. I don’t see it happening any time soon. But I think it does show what potentially good value IAG might have been back then — had the events of 2020 not unfolded.
The question now is, has the IAG share price fallen so low it can’t be ignored? I keep looking and wondering whether I should break my no-airlines rule and buy.
Have I got the IAG share price wrong?
I reckon I’ve been making a mistake when I’ve considered IAG in recent months. I’ve been thinking it’s still the same old company, and that it will get back to the same old ways in due course. It will achieve the same old capacities, with the same revenues, making the same profits.
But when a company has been through a cathartic phase, I have to throw away all my old assumptions and start again, surely. IAG has been talking about getting back to 75% of its 2019 capacity by the end of 2021. But, in the firm’s July interim statement, chief executive Luis Gallego made a key point when he spoke of “a structurally changed industry“.
Uncertain aviation future
Looking to the post-pandemic future, amid the growing fossil fuel crisis, I find it very hard right now to get any feel for what the aviation industry is going to look like in even a few years time. And that means it’s even harder for me to work out a meaningful valuation from the current IAG share price.
Against that, though, I am still convinced that the IAG we had before Covid was undervalued. Had the events of 2020 not intervened, I reckon there’s a good chance IAG shares would be a fair bit higher today.
So what will I do? For now, I’m going to keep watching. Key for me will be that 75% capacity thing. If IAG clears my doubts and makes it, I would consider buying.
