Tempted by the IAG share price? Here’s what you should know

The IAG share price slumped last week due to the company’s €2.7bn rights issue. Roland Head explains what this means and whether it’s time to buy.

| 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.

British Airways

Image source: British Airways

The collapse of the International Consolidated Airlines Group (LSE: IAG) share price this week was not due to a fresh round of bad news from the firm.

What happened is that on 14 September, shares in the owner of British Airways started to trade without the rights needed to take part in IAG’s €2.75bn equity fundraising. The price we’re seeing now is what the market reckons the stock will be worth after an expected 2.9bn new shares are added to the group’s existing 1.9bn shares.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

In this piece I’m going to explain what happens next and estimate some new valuation metrics for IAG. I’ll also explain whether I think this could be a good time to buy.

Worse than expected?

If you owned IAG shares on Friday 11 September, you’ll have the right to subscribe for three new shares for every two you already own. If you bought the shares from 14 September onwards, your shares won’t have these rights.

The new shares are being sold at €0.92 each, which is why IAG’s share price fell so sharply on Monday. The new share price effectively averages out the price of the old and new shares.

In theory, IAG shares should have fallen to 131p on Monday, based on Friday’s price of around 200p. In reality, the IAG share price has fallen much further since then — as I write, the stock is trading at 114p.

Bad news on Covid and fears of further lockdowns probably aren’t helping. But it’s possible that investors are also taking an increasingly cautious view of how long it will take long-haul airlines to recover.

IAG share price: time to buy?

Despite the short-term gloom, the pandemic will be over at some point. And I suspect that people will still want to fly. IAG’s decision to raise €2.75bn in fresh equity looks sensible to me. I can’t guarantee that it will be enough to fund the group’s recovery, but it should certainly reduce the risk of a cash crunch.

I’ve been taking a look at how this airline group might be valued after the rights issue is finished.

When the new shares are added to the existing ones, IAG will have almost 5bn shares. Using this number, we can calculate revised estimates for earnings per share.

Looking at forecasts for 2021, I estimate that the stock trades on around 47 times earnings. That’s not cheap at all, and I wouldn’t expect a dividend either.

However, this is an extreme cyclical low for airlines, so I’d expect such a high P/E ratio. That could actually be a buying signal! After all, my sums suggest that IAG’s 2019 net profit of €2,387m would price the stock at just 2.6 times earnings. That’s certainly very cheap.

A problem is that I’m not sure if IAG’s profits will ever return to recent highs. Even if they do, I think it will take at least four or five years.

But is IAG’s share price cheap enough to buy? I think it probably is. However, with such an uncertain outlook, I’d prefer to invest in companies with wider exposure to the aviation market. For now, I think IAG is a stock to avoid.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

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

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

This cheap share fell 30% last week. I’d buy now

This huge US corporation saw its shares crash by 30% last week. But I'd buy this surprisingly cheap share now…

Read more »

Various denominations of notes in a pile
Investing Articles

These 7 shares produce passive income of 7% to 11% a year!

Passive income is extra money I make without working. By buying these seven shares, I could earn 8.9% a year…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

6.6%+ dividend yields! 2 FTSE 100 dividend stocks to buy

Finding the best dividend stocks to buy requires extra care today as soaring inflation takes a bite out of shareholder…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

At 85p, are Rolls-Royce shares a slam-dunk buy?

The Rolls-Royce share price is in penny stock territory. Roland Head explains why he thinks this FTSE 100 stalwart looks…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

‘Big Short’ investor Michael Burry is buying this quality growth stock! Should I?

In the first quarter, Michael Burry bought more of this growth stock. Is this a hint that I should also…

Read more »

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

These 5 FTSE 100 shares crashed in 2022. I’d buy 1 today

Although the FTSE 100 index is flat in 2022, some Footsie shares have crashed hard this year. But I see…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How investors can boost their passive income when the FTSE is falling

Stock markets are plagued with fears right now. Here's why I firmly believe those fears improve our passive income prospects.

Read more »