I’m always on the hunt for cheap stocks. Due to fears around the conflict in the Middle East, the FTSE 100 has tumbled lower in recent days. The International Consolidated Airlines Group (LSE:IAG) has been caught up in the selloff. In fact, the IAG share price is down almost 15% in a week. But is this an overreaction?
Business disruption
IAG has seen some immediate problems resulting from the conflict. Oil prices have surged higher, hitting $119 per barrel at the start of the week (9 March). Higher fuel prices directly increase airline operating costs and can compress profit margins.
Another immediate shock has come from flight disruptions. Tensions have led to closures of some Middle Eastern airspace and flight cancellations, affecting some of IAG’s travel routes. Airline stocks in general have reacted quickly as investors worry about delays, rerouting costs, and weaker travel demand.
Even though these remain risks going forward, I think the stock looks cheap when I take a step back and take a Foolish long-term investment approach.
Record profits posted
Earlier this month, the business reported full-year results, detailing a record operating profit of $5.8bn. Revenue was up for all of the individual carriers within the group. This is important as it shows demand in both short-haul and long-haul ranges.
Impressively, some divisions like British Airways and Iberia are operating with margins above 15%. This is being flagged as unusually high for airlines, but it shows how efficiently the business is being run.
The overall takeaway is that the underlying company is doing very well. I don’t see the conflict in the Middle East lasting long. If I’m correct, the negative impact for IAG could be minor and just seen as a blip. Therefore, the 15% fall over the past week could represent a potential buying opportunity.
Attractive valuation
The move lower has pushed down the price-to-earnings (P/E) ratio. It currently stands at just 5.88. This is low compared to the FTSE 100 average ratio of 17.9, but also low relative to my benchmark figure of 10. Therefore, the stock can be considered cheap not just based on my subjective assessment of the company’s performance, but also on objective financial metrics such as the P/E ratio.
Even if the earnings per share don’t materially increase over the coming year, the share price could double, and the ratio would still be below the index average. This goes some way to show the extent of how large any share price rally could be if the Middle East conflict eases.
The stock is still up 12% over the past year. Yet, with the share price at the lowest level since last summer, I think it could be considered by investors looking for potential value picks.
