75% down from 2020, is IAG’s bargain-basement share price unmissable?

IAG’s share price is around 75% lower than its pre-Covid level and looking very undervalued to me, despite stellar results. So should I buy?

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International Consolidated Airlines Group’s (LSE: IAG) share price is around three-quarters lower than it was in January 2020.

After Covid hit, airline passenger numbers fell over 90% in 2020 and 2021, and its share price fell with them.

Matters did not improve for it in 2022, with the Russian invasion of Ukraine. This caused jet fuel prices to spike and catalysed a cost-of-living crisis that crushed the overseas holiday market.

Covid has long since retreated, energy prices have come down, and the cost-of-living crisis appears to be easing. But IAG’s share price is still at a bargain-basement level. So, should I buy the stock?

Undervalued?

If the stock isn’t undervalued against its peers then that’s me out of the running straight away.

As the company pays no dividends, my only return can be from a share price rise. But if there’s no genuine value in the shares, then that’s very unlikely to happen over the long term.

However, IAG currently trades at the key price-to-earnings (P/E) stock valuation measurement of just 3.5. This is by far the lowest of its peer group, the average of which is 12.

discounted cash flow analysis shows IAG shares to be around 74% undervalued at their present price of £1.61! So, a fair value would be about £6.19.

That doesn’t mean that they’ll ever reach that price, but it does confirm there is very good value there.

Back to basics

The basic business also looks good, with 2023 results showing total revenue up to €29.5bn from €23bn in 2022. Operating profit nearly tripled (from €1.3bn to €3.5bn), and profit after tax jumped even more — from €431m to €2.7bn!

It also more than doubled its operating margin (from 5.4% to 11.9%) and recovered capacity close to pre-Covid levels in most of its core markets.

Additionally, it took the opportunity to reduce its net debt-to-EBITDA ratio from a concerning 3.1 down to a much healthier 1.7. A level of around 1.5 or less is considered good for companies not in a high-cash-flow business.

So will I buy it?

The final factor in buying stocks in my experience is the age of the investor.

The younger they are, the more time they can wait for stocks to recover from any major price fall.

A longer timeframe also allows for the flattening out of any shorter-term shocks seen in the market more widely.

I’m over 50 now and am looking to continue to reduce my working commitments. This means maximising income from my investments and not waiting around for any growth shares to recoup major price losses.

At my point in life, the risks in IAG are too high. There could be another pandemic that cripples the aviation sector again. Oil prices could rocket up on soaring tensions in an already dangerous Middle East.

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.

If I were 20 or 30 or even 40, I would probably buy IAG shares as a long-term growth stock. But at 50+, I am not willing to take the risk.

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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