The International Consolidated Airlines (LSE: IAG) share price has suffered extreme volatility since the stock market crash last year. In fact, compared to its pre-pandemic price, it’s fallen 64% to around 150p. This makes IAG one of the worst performing UK shares since the pandemic began. But due to this massive discount, are IAG shares undervalued and should I buy?
Trading update
Its trading updates have not been comfortable to read recently, and the most recent half-year trading update was no different. Indeed, the airline reported a large operating loss of over €2bn. Although this was lower than last year’s figure of €4bn, it’s still far too high and a serious worry for customers.
The recovery is also looking fairly slow, with passenger capacity in the second quarter just 21.9% of 2019. It is hoped that this will improve to around 45% for the third quarter, yet significant uncertainty remains. Accordingly, it remains unclear when the company will be able to make a profit again. This is likely to continue to have a negative effect on the IAG share price.
Nonetheless, while the headline figures look grim, there are positives to take away as well. For example, as of June 30, it had liquidity of €10.2bn. This was primarily due to bonds issued by the group, alongside a $1.755bn revolving credit facility and the money raised from the rights issue last year. Although this means that net debt has now reached over €12bn, compared to under €10bn last year, it’s promising to see that IAG is not facing a liquidity crisis any time soon.
Other factors
Although liquidity is strong, I do have worries that costs are going to keep rising. Indeed, IAG has a pension deficit of €30bn, and this needs to be paid up. While it deferred these contributions due to Covid, it’s set to resume payments of €41m each month from October. This will increase the costs for the company, at a time when it’s struggling to generate any significant revenues. Accordingly, despite statements to the contrary by CEO Luis Gallego, there are fears that, like easyJet, it will have to issue more shares. This would dilute the IAG share price, having a negative effect.
On the other hand, there are some signs that international travel is starting to return towards 2019 levels. This is because the UK government is in the process of abandoning PCR tests for cheaper lateral flow tests for fully vaccinated passengers. Several countries, like Turkey and Pakistan, have also been removed from the red list. And good news came on travel to the US this week. This may help boost the IAG share price.
Is the IAG share price undervalued?
Although a stock may be cheaper than it was before, this does not necessarily equate to better value. I believe that this is the case with IAG. The airline has accumulated huge losses over the pandemic and its future looks uncertain. With a price-to-book ratio of around 10, far higher than it has been in the past, I also don’t think that the IAG share price is as cheap as many people may think. Although there is always the chance that the share price will soar, I’m staying away.
