The Motley Fool

The IAG share price plunges: here’s what I’d do

The IAG (LSE: IAG) share price plunged in early deals today. This decline has taken the shares back to the level last seen at the depths of the financial crisis. 

However, there’s a very good reason why the stock has plunged nearly 30% today. I think this has only improved the attractiveness of the airline group to investors. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

IAG share price slump

Today, the owner of British Airways, completed a fundraising. The group raised €2.7bn from shareholders by issuing new stock.

This has diluted existing investors, which means each share now represents a much smaller percentage of the overall business than it did on Friday. As such, each individual share is worth less. That’s why the stock price has fallen today. 

This cash call isn’t necessarily a bad thing. It may have hit the IAG share price, but it will give the company a large financial cushion to withstand the coronavirus storm.

According to its latest trading update, at 31 August, the group had total liquidity of €7.6bn, including €5.8bn of cash and €1.8bn of “undrawn and committed general and aircraft facilities.

With the extra €2.7bn from shareholders, IAG’s total financial resources will be over €10bn. Few other airline groups have such a strong balance sheet. Management is also taking other actions to try and stabilise the business.

British Airways is in the process of reducing headcount by up to 13,000. Meanwhile, IAG’s other European airlines are making the most of government employment schemes and are consulting on further job losses. 

Growth ahead

At present, management believes demand across the group will return to 70% of 2019 levels by 2021. That suggests the company’s earnings could make a strong recovery next year. Therefore, it looks as if the IAG share price offers a wide margin of safety at current levels. 

The company has a current market capitalisation of just under €4bn. By comparison, in 2019, the group reported net income of €1.7bn. If income only returns to 50% of this level in 2021, that suggests the stock is currently dealing at a mid-single-digit price-to-earnings (P/E) ratio. I think that’s cheap compared to the business’s long-term potential. 

And IAG may even surpass this forecast. Its strong balance sheet could give the group an edge over international and European peers, allowing it to take market share and grow earnings at a faster rate. 

So, all in all, I reckon that now could be a good time for risk-tolerant long-term investors to buy a share of IAG. The company’s near-term outlook is uncertain, but its strong balance sheet, global footprint, and brand recognition should help the group stage a recovery in the next few years.

As noted above, if the company can return to 2019 levels of profitability, the IAG share price could produce large total returns from current levels. In my opinion, management’s decision to act quickly and strengthen the group’s balance sheet has only improved the investment case.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.