The airline industry has had a tough time since the onset of the pandemic. With global airline traffic coming to a near standstill, much of the sector found itself plunged into heavy debt. This was the case for IAG (LSE: IAG), which saw its revenues collapse and debts mount. Since then, things have drastically improved. However, IAG shares are still down 33% year to date, and down 33% over a 12-month period. I am using this fall to load up on cheap shares!
Why the shares have crashed
Inflation has been wreaking havoc with markets, and rising interest rates are making things worse for stocks. This is because as rates rise, investors are able to earn a higher risk-free rate, and hence pull their money out of speculative assets like stocks.
In addition to this, rising inflation is fuelling a cost-of-living crisis. This has led to strikes across several industries, including the airline business. IAG has had to battle against this threat in recent months, and it seems to have tainted investors’ taste for the stock.
Ready to take flight
One of the reasons I think IAG shares look so enticing is due to their recent results. For the six months to 30 June 2022, the group turned a profit of €293m. For context, it reported a loss of almost €1bn in 2021, signaling a strong turn of events.
The group’s cash position also increased substantially. At just over €9bn, it marks a €1.2bn increase from December 2021 levels. While cash has been increasing, debts have also shrunk by around €700m. These factors have largely been driven by the increase in bookings for the second half of the year.
The increase in bookings is a wider point worth considering. IAG itself reported that passenger capacity rose to 78% of 2019 levels in Q2 2022, up from 65% in Q1. More widely, it is estimated that 3.5bn customers will board flights in 2022, up from 1.8bn in 2020. The increase in footfall should vastly improve the group’s top line and filter down into increasing profits.
The outlook of the group also remains largely positive. Operating profit is expected to be improved for Q3 2022 and the whole year is expected to be profitable. Net cash flow predictions also signal positivity.
Finally, at just 106p, I think the value of this company really shines through. Before the pandemic, the group’s stock was sitting comfortably above the 400p level. While past returns are not indicative of future performance, it does signal to me that investors have been willing to pay that much IAG. As passenger footfall increases, cash increases and debts fall, I don’t see any reason why investors wouldn’t pay that much again in the future.
The verdict
At 106p, I think the long-term value of the stock outweighs the shorter-term risks of strikes and inflation. At The Motley Fool, we are long-term investors, and as such, I am willing to look past the short-term issues that IAG may face and add a position to my portfolio at the current price.
