IAG shares – pie in the sky or a great opportunity?

IAG shares have had a terrible time this year. But are they worth buying? Anna Sokolidou thinks she knows the answer.

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British Airways

Image source: British Airways

Airlines have had a terrible time this year, as we all know. IAG (LSE:IAG) shares have by no means been an exception. But is IAG now ready for a take off?

IAG shares

The IAG stock price has suffered in recent couple of days. Apart from the stock market’s overall correction, there were two big reasons for the decline.

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First, the airline’s CEO decided to step down. The truth is that the decision wasn’t spontaneous. Willie Walsh planned to quit the company in March. But due to the pandemic, he delayed his departure from the company. Still, it creates further uncertainty at a time when IAG has to cope with new challenges. 

Second, new equity was issued to raise €2.75bn in cash. The company’s shareholders approved of this decision. Indeed, it was a necessary step to save IAG’s financial position. But it was painful for the existing stockholders. When a company issues new equity, the existing shareholders are diluted. The share price goes down as a result.

Other challenges

My colleague Roland Head wrote an excellent article about the company’s equity issue. After all, it depends on how much cash a company wants to raise. The €2.75bn issued will be the lion’s share of the company’s current market capitalisation. So, IAG shares will depreciate substantially. 

But there is also one important point about the airline’s business model. As we all know IAG is the owner of British Airways. So, it’s in no way a low-cost airline. That means it’s more vulnerable to any economic crises than cheap airlines like easyJet. What’s more, it’s important for expensive airlines’ customers to feel comfortable onboard. That’s why the requirement to wear a mask is really discouraging. Then, older people – typical IAG customers – are more health-conscious than easyJet’s typically younger passengers. So, IAG customers are likely less willing to travel during the pandemic.

That’s why I think easyJet is more resilient to the coronavirus crisis than its competitor IAG. 

Moody’s downgrade

The IAG shares might have also suffered badly from Moody’s action. The credit rating agency downgraded the company to Ba2 from Ba1 on 7 September. The company has had a junk credit rating since 28 May. But on 7 September it was downgraded even further. Sure, the agency views the recent equity issue as a positive sign for IAG. However, Moody’s is pessimistic about the airline industry’s pace of recovery. According to the agency, if passenger traffic stays the same, the company will have enough cash for 500 days only. That’s not great. But if the coronavirus gets under control within this time frame, IAG will most probably survive. 

Are IAG shares worth buying?

In my view, IAG is a high-risk/high-reward play. A patient investor willing to take on risk might earn a fortune. But a more conservative person will be better off staying away from the stock, I think. I’d personally stay away from the shares. The Motley Fool offers excellent catalogues where you could get much better investment ideas.

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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.

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