Is IAG’s share price now too cheap to ignore?

IAG’s share price has struggled to recover from multiple shocks, but it now looks very undervalued against its peers, with business on an uptrend.

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International Consolidated Airlines Group’s (LSE: IAG) share price is less than a quarter of what it was in January 2020.

The onset of Covid in 2020 caused airline passenger numbers to fall over 90% that year and in 2021.

After that, Russia’s February 2022 invasion of Ukraine caused an extended spike in the oil price. This dragged jet fuel costs higher with it.

Rising energy prices then drove inflation higher, leading to a prolonged cost-of-living crisis.

The risks of another pandemic and of another long spike in energy prices remain in the stock, in my view.

And 24 January saw the European Commission open an anti-competition investigation into IAG’s plan to buy out Air Europa. This could lead to fines and/or to the amendment or cancellation of the deal.

All of which brings me to the question of time in buying stocks.

Long-term investment

Investing for the long term allows a company time to realise its potential – or its ‘value’, in market terms. It also allows for the flattening out over time of any short-term shocks seen in a market or individual stock.

So, for the long-term investor, the only worthwhile question to consider in buying a stock is ‘does it have value’?

Undervalued against its peers

IAG trades at a price-to-earnings (P/E) ratio of just 3.5 against a peer group average of 13.6. This comprises Jet2 at 6.5, Japan Airlines at 11.7, easyJet at 12.8, and Wizz Air at 23.5.

discounted cash flow analysis shows IAG shares to be around 65% undervalued at their present price of £1.46. 

A fair value would be about £4.17, although this does not necessarily mean the shares will ever reach that price.

Back to black

Aside from the share price, the second part of the value equation for me is how strong the business looks.

On 6 December, the International Air Transport Association forecast airlines’ 2024 revenues would rise 7.6% year on year, to a record $964bn. It added that operating profits would reach $49.3bn in 2024, from $40.7bn in 2023.

Even before that, though, IAG had swung back into the black. It posted a pre-tax profit in H1 2023 of €1.04bn, following a loss of €843m a year before.

In Q3, operating profit grew to €1.745bn against €1.216bn in Q3 2022.  

Overall, the company expects full-year 2023 capacity to be around 96% of pre-Covid levels. The 2023 results will be released on 29 February.

Will I buy it?

The length of my investment horizon changed when I turned 50.

I wanted to dramatically scale down my work in the following few years, which meant two things.

One, maximising my regular income from high-dividend-paying shares. And two, not having to wait for a growth stock to recover from any sudden share price collapse.

Consequently, I sold most of my growth stocks and invested the proceeds into high-yielding ones.

IAG does not pay a dividend, and it has significant risks attached to it, as analysed above. So, at my stage in life with my specific investment goals, I will not be buying it.

However, before my milestone birthday, I probably would have bought it for the long term for two reasons. First, it appears very undervalued to its peers, and second, it is a leader in its business sector.

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 assessed. Consider taking independent financial advice.

Simon Watkins 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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