Bullish: Cliff D’Arcy
If you’d asked me six months ago whether I was bullish on International Consolidated Airlines Group (LSE: IAG) shares, my answer would have been a firm NO. But a lot can happen in half a year and I’ve since changed my mind. Why have I turned positive on IAG stock? Two reasons.
First, I’m starting to see light at the end of the Covid-19 tunnel. It could just be the lights of another oncoming train, but I see reasons to be optimistic about the world economy. In the developed world, massive vaccination programmes now protect billions from coronavirus’ worst effects. Elsewhere, inoculations proceed at a slower pace, but should eventually catch up. And the more folks get vaccinated, the less damage Covid-19 wreaks. Eventually, if we win the war against coronavirus, then demand for air travel should explode. It may even return to pre-2020 levels. And that’s good news for IAG.
Second, the IAG share price has fallen so far since peaking in March. As a value investor, I’m drawn to beaten-down stocks. But IAG is massively loss-making at present, so there are no fundamentals (profits, earnings and dividends) to guide my thinking. On 16 March 2021, IAG shares hit their 2021 intra-day peak of 222.1p. On Monday, they leapt 10.9% to close at 165.86p. I said the stock might just be a steal at 137.25p last Thursday. It has since soared 20.8% in three trading days, so I’m betting on this trend continuing!
Cliff D’Arcy has no position in International Consolidated Airlines.
Bearish: Alan Oscroft
Richard Branson famously once explained how to become a millionaire. You start with a billion, then launch an airline.
Airlines, especially long-haul ones, enjoy little or no competitive advantage. They compete almost 100% on price alone.
Still, even if the business is a cut-throat one, there must be a good price to buy in at, surely? After all, the IAG share price has tanked 75% since Covid arrived. Well, yes, we can often profit from recoveries even in sectors we don’t like.
IAG’s financial situation has changed, though, and comparisons are tricky. The share price alone is misleading, because there are so many more shares now in existence after new fundraising issues. But if we take IAG’s market cap and add on net debt, we get a thing called its enterprise value. That’s how much it would cost to buy it out, pay off its creditors, and own the business itself.
At today’s market cap of approximately £7.6bn and net debt (at 30 June 2021) of £10.4bn, that’s an enterprise value of £18bn. Back in mid-February 2020, just before the big crunch, we were looking at a market cap of around £12.0bn plus net debt (at 31 December 2019) of £6.5bn. That’s a pre-crash enterprise value of £18.5bn. There’s really not much difference.
These are only approximations based on current exchange rates. But it does suggest that, despite the big share price fall, IAG is not much better value now than it was before.
In fact, with the medium-term prospects for air travel still looking tough, I would argue that IAG is more overvalued now than before the crisis.
Alan Oscroft has no position in International Consolidated Airlines.
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