The airline industry worldwide has had a disastrous year. For obvious reasons, flights have been grounded and travel virtually ceased for months. There has been a lot of talk about Covid-19 changing the airline industry forever. It has been suggested that significantly fewer people will travel even after we return to some form of normality.
While this may be true for a few years, the industry will recover. Consumers love to travel and memories of traumatic events are short. For instance, despite predictions that the tragic events of 9/11 would significantly reduce air traffic in the US, it had little to no effect in the long run.
While businesses have continued to meet from a distance, this is not viable in the long run. If professionals like consultants do not want to travel any more, they will have to lower their prices to reflect their lower costs. It is unlikely that this will occur.
While it is impossible, as other authors have noted, to predict when the industry will rebound, it is almost a certainty that flight volumes will increase from their current levels. As revenues increase, airline stocks will increase too, leaving an opportunity for bold investors to profit. Even if flights do not reach 2019 volumes for several years as analysts are suggesting, stocks will still recover from current lows. I believe that International Consolidated Airlines Group (LSE: IAG) is a bargain stock right now, and is the right choice to outperform the FTSE and its competitors.
Unlike US airline stocks like American Airlines Group and Southwest Airlines, which have experienced high volatility, European airline stocks have remained very low. Out of the five largest European airlines, IAG -which is third in terms of size – has declined the most year to date at 67%. This is despite having an arguably stronger balance sheet! When compared with the year to date return of the FTSE 100, which is currently around -19% at the time of writing, IAG presents a great opportunity. At this price, IAG is a bargain stock that should outperform the market.
IAG has the second most cash and equivalents out of the same group of airlines, and has a forward P/E ratio significantly above the average. This ratio measures the stock price against the predicted earnings per share. Currently, all five have negative ratios, because analysts are predicting losses this year. This is not surprising considering the lack of revenue in the past few months. However, at -1.8, IAG’s loss should be survivable, unlike Ryanair, whose forward P/E ratio sits at -17.6. This to me demonstrates that IAG is unfairly discounted and is a bargain stock for the risk-taking investor.
IAG does have the highest level of debt, which at face value makes it seem like a very high-risk investment and explains why the price has fallen so far. However, IAG also has the highest current ratio. So, it has the highest liquidity and ability to pay its short-term obligations (those that are within a year). This demonstrates IAG’s strength, despite its high debt level. At this price even with its debt, I believe that IAG is a bargain stock and I am not the only one amongst my fellow Fools.
Charles Heighton has no position in any 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.