The IAG share price plunges: here’s what I’d do

The IAG share price is under pressure after the company’s latest trading update. But investors should focus on the long term, says Rupert Hargreaves.

| 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 IAG (LSE: IAG) share price plunged in early deals today. This decline has taken the shares back to the level last seen at the depths of the financial crisis. 

However, there’s a very good reason why the stock has plunged nearly 30% today. I think this has only improved the attractiveness of the airline group to investors. 

IAG share price slump

Today, the owner of British Airways, completed a fundraising. The group raised €2.7bn from shareholders by issuing new stock.

This has diluted existing investors, which means each share now represents a much smaller percentage of the overall business than it did on Friday. As such, each individual share is worth less. That’s why the stock price has fallen today. 

This cash call isn’t necessarily a bad thing. It may have hit the IAG share price, but it will give the company a large financial cushion to withstand the coronavirus storm.

According to its latest trading update, at 31 August, the group had total liquidity of €7.6bn, including €5.8bn of cash and €1.8bn of “undrawn and committed general and aircraft facilities.

With the extra €2.7bn from shareholders, IAG’s total financial resources will be over €10bn. Few other airline groups have such a strong balance sheet. Management is also taking other actions to try and stabilise the business.

British Airways is in the process of reducing headcount by up to 13,000. Meanwhile, IAG’s other European airlines are making the most of government employment schemes and are consulting on further job losses. 

Growth ahead

At present, management believes demand across the group will return to 70% of 2019 levels by 2021. That suggests the company’s earnings could make a strong recovery next year. Therefore, it looks as if the IAG share price offers a wide margin of safety at current levels. 

The company has a current market capitalisation of just under €4bn. By comparison, in 2019, the group reported net income of €1.7bn. If income only returns to 50% of this level in 2021, that suggests the stock is currently dealing at a mid-single-digit price-to-earnings (P/E) ratio. I think that’s cheap compared to the business’s long-term potential. 

And IAG may even surpass this forecast. Its strong balance sheet could give the group an edge over international and European peers, allowing it to take market share and grow earnings at a faster rate. 

So, all in all, I reckon that now could be a good time for risk-tolerant long-term investors to buy a share of IAG. The company’s near-term outlook is uncertain, but its strong balance sheet, global footprint, and brand recognition should help the group stage a recovery in the next few years.

As noted above, if the company can return to 2019 levels of profitability, the IAG share price could produce large total returns from current levels. In my opinion, management’s decision to act quickly and strengthen the group’s balance sheet has only improved the investment case.

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.

Rupert Hargreaves 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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »