After a blistering run, International Consolidated Airlines Group (LSE: IAG) shares have dropped 9% in the last month. Is this an opportunity to buy them at a dirt cheap valuation, or a warning of worse to come?
I should start by saying I bought shares in the British Airways owner in April. And they’ve done brilliantly.
I snapped them up on a dip, after they’d been beaten down (like the rest of the stock market) by Donald Trump’s ‘Liberation Day’ tariffs. I’d been waiting for an opportunity to buy IAG, as it’s also known, and decided this was it. I was right. My shares have climbed 50% since.
Flying FTSE 100 company
Long-term investors have done even better with the shares up 185% over three years. As a benchmark, they’re up 36% over 12 months.
Even as a fan of the stock, I have to admit it’s risky. We all take flying for granted these days, but running a profitable carrier isn’t easy. There are so many things beyond the control of management, and any of them can hammer revenues and profits. Fuel prices are the obvious one. If they surge, the bottom line looks very different. Luckily, they’re quite low right now.
Air traffic controller strikes, taxes on travel, war, bad weather, natural disasters and recessions are all threats. The best (or rather, worst) example was the pandemic when fleets were grounded, but IAG still had to spend a fortune paying staff and servicing aircraft.
International Consolidated Airlines Group only survived thanks to rights issues, emergency loans and state support. Net debt peaked at around €11bn but that’s now been halved, and the board’s rebuilding dividends and even rewarding shareholders with a €1bn share buyback.
Dirt cheap stock valuation
We’re flying again but there are other threats, as tariffs could slow global trade, hitting demand for business travel, and there’s talk of a recession, including in the US.
Q3 results, published a month ago (7 November), are largely to blame for the recent dip. Operating profit rose 2%, but this was below forecasts for €2.19bn. Pre-tax profit dipped 2.1% to €1.87bn, with revenues from the key North Atlantic market slipping.
IAG’s share price now looks incredible value as a result, with a price-to-earnings ratio of 7.93. That’s less than half the FTSE 100 average. So is there a catch?
Given all the risks I’ve listed, I suspect the stock may always trade it a bit of a discount. Investors will be wary of bidding the shares too high. Memories of the pandemic linger. So I’m not expecting the shares to suddenly take off like a rocket.
However, I think there’s a solid, long-term recovery story here that’s well worth considering. But investors should brace themselves for more turbulence. IAG will be on the front line of future economic uncertainty, and this may not be the last buying opportunity we see.
