The IAG (LSE: IAG) share price has been flying high so far this year. In fact, anyone buying the stock at the start of 2023 would be sitting on a near-30% return. Go back 12 months and this approaches 40%.
In spite of these great gains, the valuation still looks very low.
So, is this now an unmissable value stock?
I was wrong!
First, let me hold my hands up — I was very sceptical of IAG’s ability to deliver anything like this return so soon.
Sure, the demand to fly was always likely to be strong following a pandemic that kept the majority of us indoors. And yes, IAG probably stood to benefit more than the budget airlines from a rebound in business-related travel.
However, my belief that a cost-of-living crisis brought about by rampant inflation would keep the share price under the cosh was clearly wide of the mark.
Still cheap
The question now faced by any investor who, by luck or brilliance, has managed to ride this positive momentum is whether it’s time to take some profit or hang in there.
Based on a recent survey from travel IT firm Amadeus, it might be worth sticking around. This showed that 47% of respondents believed international travel was a high priority for this year and next. That’s up from 42% in the previous year.
Moreover, the stock still looks cheap based on traditional metrics. A price-to-earnings (P/E) ratio of a little under six surely makes IAG one of the lowest-valued stocks in the top tier.
Perhaps this goes some way to explaining why there’s absolutely no interest from short-sellers. To me, this suggests that whatever negativity surrounds the company might already be priced in.
Turbulence ahead?
On the other hand, it’s possible that we’re yet to see the full effects of higher interest rates on spending. This is particularly the case in the UK if those rates remain higher for longer.
Just how long will people be willing or able to pay the (much higher) fares to get away?
There’s also the massive debt pile to consider. Ominously, this was higher at the end of 2022 than what the actual company was worth.
Of course, IAG can look to cut back where it can. Even so, I’m not sure the balance sheet is going to be easy to repair considering the competitiveness of the industry or the steep maintenance costs that all airlines face.
As a consequence, dividends are unlikely to return any time soon. That matters to me because I’d want to be compensated if, for whatever reason, the share price sinks from here.
Would I buy this value stock?
I tip my hat to anyone who bought IAG stock when sentiment fell through the floor. Being willing to zig while markets zag takes guts.
Whether this is the best value stock in the FTSE 100 right now, however, is more contentious.
Personally, I’m not convinced.
To be considered a true bargain, I reckon it’s vital to consider the price tag relative to the company’s record of compounding wealth over the long term.
On this measure, IAG has been an absolute dog and I’m steering clear.
