The coronavirus crisis has shattered investor confidence, and many FTSE 100 stocks have plunged as a result. The IAG (LSE: IAG) share price has been hit harder than most.
Shares in the airline group have slumped by around two-thirds since the beginning of the year. Following this decline, the IAG share price is now trading at one of its lowest levels in history, which makes the stock look cheap.
But with the group facing a prolonged period of disruption, there could be further pain ahead for the business.
Is the IAG share price a bargain?
Owner of the British Airways, Iberia and Aer Lingus brands, IAG is one of the world’s largest airline groups.
Before the coronavirus crisis, City analysts were expecting the business to earn nearly €3bn in profits this year, enough to support a €0.23 per share dividend and group growth plans.
However, the company has now had to put these plans on ice. Last week, the organisation announced job cuts equivalent to 30% of its workforce after grounding 90% of its fleet in May and April, as well as cancelling it its final dividend.
These actions should help the business weather the storm. It also has plenty of capital available to keep the lights on for the foreseeable future. At the end of the first quarter, IAG had total cash and financing facilities of €9.5bn.
A long period of disruption
The company is hunkering down for an extended period of disruption. Management believes passenger demand will not to return to 2019 levels for several years, which could weigh on the IAG share price.
Other aircraft executives have the same opinion. And even when passenger demand does begin to grow again, analysts are expecting a wave of discounts. This will likely result in depressed profit margins for the industry for many years.
Therefore, it’s unlikely IAG will return to 2019 levels of profitability for the next two or three years. With this being the case, investors should prepare for a long period of disruption and volatility in the IAG share price.
At this point, IAG appears to have plenty of funding available to keep the airline group ticking over until some normality returns.
That suggests the business is unlikely to collapse. But it’s difficult to place a value on the IAG share price with losses set to continue. If the coronavirus crisis lasts for more than a year, the firm’s financial position could start to look shaky.
From one perspective, however, the IAG share price does look cheap. It’s dealing at a price-to-book (P/B) value of 0.7. This implies the IAG share price offers a wide margin of safety at current levels.
So, for bargain-seeking investors with a long-term outlook, now could be an excellent time to buy a share in this leading aviation business. However, it could be years before the IAG share price returns to its all-time high of 707p.
Rupert Hargreaves 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.