Is the IAG share price now too cheap to ignore?

Rupert Hargreaves explains why he thinks the IAG share price looks cheap compared to the company’s growth potential over the next 24 months.

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After rising 24% over the past 12 months, the IAG (LSE: IAG) share price has been falling recently. Since the beginning of March, the stock has declined in value by 26%. 

This means it is now trading around the same level as it was at the beginning of 2021. However, since the beginning of the year, the world has turned the tide against coronavirus. And this has enabled the aviation industry to begin rebuilding. 

IAG share price outlook 

According to the airline group’s results for the six months to the end of June, passenger revenue in the first half was 73% lower than the same period in 2020. This might look not very reassuring, but it is essential to remember that the world was still operating as usual throughout the first three months of 2020.

If I drill down into the numbers, I can see that IAG reported an operating loss of €967m for the second quarter of 2021, compared to a loss of €2.2bn for the same period of 2020. 

It appears as if the company’s financials will improve in the second half of the year as well. IAG planned to fly 45% of its flight schedule in the third quarter, up from 20% in the three months to the end of June. 

All of the above suggests to me that the future for the IAG share price is looking up. Unfortunately, the company is projected to remain loss-making for the foreseeable future. This makes it difficult for me to value the stock. 

It is difficult, but not impossible. One way to value businesses that are losing money is to consider their ratio of sales to price. The so-called price-to-sales (P/S) ratio is a good way of gauging a company’s worth compared to its peers if it is losing money. 

Based on City projections, which use the firm’s own predictions, IAG is selling at a forward P/S ratio of around one. Peer easyJet is trading at a ratio of more than two, while US peer Delta is selling at a multiple of approximately 1.5. 

These numbers are only a rough indication of value. Nevertheless, they appear to show that the IAG share price looks cheap compared to its peers. 

Uncertainty prevails 

While the stock may look cheap, I should note that the business faces an incredibly uncertain future. It could be years before the aviation industry returns to 2019 levels of activity. Further, another spate of lockdowns could decimate its recovery. I also need to consider the environment. New environmental taxes could dramatically increase the cost of flying consumers, reducing demand and preventing a strong comeback. 

After taking these challenges into account, I would not buy the stock today. While it seems as if the IAG share price looks cheap compared to peers, I am concerned about what comes next for the business. At this stage, it is just too hard for me to tell. 

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 considered so you should 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.

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