The IAG (LSE: IAG) share price plunged in value earlier this year as the coronavirus pandemic virtually wiped out demand for air travel around the world.
As the airline giant’s revenue evaporated, investors rushed to sell the stock. This seemed like a sensible decision at the time.
However, over the past few months, as the number of passengers travelling has started to increase again, the IAG share price has continued to languish. As such, it has become more attractive from a value investing perspective.
With that in mind, today I’m going to take a look at the company and see if it’s worth doubling down on the stock after its recent declines.
IAG share price value
The owner of British Airways has been through hell over the past nine months. While the company entered the crisis in a better position than most of its peers, it has still struggled to survive. Luckily, shareholders and creditors have been happy to support the enterprise. The company had total liquidity of €7.6bn by the end of August, including €5.8bn in cash and equivalents.
On top of this, at the beginning of September, the airline group launched a steeply discounted €2.75bn rights issue. The issue helped stabilise the IAG share price.
This additional cash will help stave off bankruptcy in the near term. But the company is not out of the woods just yet. Bookings across the group have only recovered to about 30% of pre-pandemic levels. What’s more, management is forecasting a 63% decline in overall capacity for 2020.
The airline doesn’t expect activity to return to 2019 levels for several years. To put it another way, with sales and profits set to remain low for the foreseeable future, it looks as if the IAG share price deserves to trade at a lower level than it did in 2019.
To help right-size the business, management is slashing jobs. It’s planning 13,000 job losses at British Airways, mainly through voluntary redundancies. Of this total, 8,000 positions have already been removed.
Putting a price on the stock
So, after taking all of the above into account, how much is the IAG share price actually worth? With losses expected for the next two years at least, it isn’t easy to put a price on the shares. There’s also the dilution from the rights issue to take into account. This roughly doubled the number of IAG shares in issue.
Still, suppose the group can return to 2017 levels of profitability within the next five years. In that case, it could earn as much as 30p per share (including the rights issue dilution), according to my calculations. Over the past five years, the stock has traded at an average price-to-earnings (P/E) multiple of around 5. This gives a potential share price of 150p.
Therefore, based on these models projections, it seems as if the IAG share price offers a wide margin of safety at current levels. As such, it may be worth doubling down on the stock. Although it’s highly likely the company will encounter further turbulence in the years ahead.
