Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year, should I buy now?

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International Consolidated Airlines’(LSE: IAG) share price has dropped around 73% since 17 January 2020. After that, the effects of Covid intensified around the world, reducing airline passenger numbers by 90%+ in 2020 and 2021.

With the virus now having retreated, such a price drop might signal a buying opportunity for me. So, I ran a check on whether it is, beginning with business fundamentals.

How does the business look now?

2023 results saw operating profit nearly tripling from €1.3bn to €3.5bn, and profit after tax jumped from €431m to €2.7bn.

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

Q1 2024 results saw operating profit leaping to €68m from €9m in the same period last year.

So far, so good, as far as I am concerned.

No dividend, but is it undervalued?

Less good for me is that the company has paid no dividends since 2019. This means that my only prospect of a return from owning the shares currently would be from a price rise.

And like all out-and-out growth stocks that pay no dividends, this would only come if I sold the shares. However, if there is no value in the stock, then any such price rise is unlikely, in my view.

Looking at the key share valuation measurements, IAG’s price-to-earnings ratio (P/E) is currently 3.6. This does look cheap against its peer group’s average P/E of 8.5.

How cheap though? A discounted cash flow analysis shows the shares to be around 19% undervalued at their present price of £1.69.

This is not that much of a discount to fair value compared to several other stocks I already own. And there is no guarantee the stock will ever reach that price, of course.

It is even less likely given the huge risk overhang, in my view. On 24 January, the European Commission (EC) opened 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.

Further major risks are rising oil prices that push up jet fuel costs and another pandemic that would cripple air travel again.

So will I buy it?

A key factor in making good financial decisions is understanding where one is in the investment cycle.

The younger a person is, the more time they can wait for stocks to recover from any major price fall. I am now over 50, and my focus has shifted to minimising risk but maximising regular rewards in the form of dividends.

My core high-yield portfolio makes me an average annual return of 8.5%+, and I am happy with this. I also have a few growth stocks (which also pay a moderate dividend), that I bought at much lower prices. I am happy with these too.

Therefore, at this point in my investment life, there is no point in me buying IAG. If I were much younger I would consider it, but not before I knew the outcome of the EC investigation.

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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