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Is the IAG share price still cheap enough to buy?

Image source: British Airways

The International Consolidated Airlines Group (LSE: IAG) share price has doubled since November. However, the stock didn’t move on Friday morning after the airline group announced a first-quarter loss of €1.1bn.

The share price reaction tells me that today’s result was in line with expectations. Losses were expected and the market is happy to look ahead to the reopening trade. I reckon airlines will make a good recovery over the next couple of years. With a return to holiday flying seemingly on the horizon, should I be buying this stock for my portfolio?

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The story today

IAG says that passenger capacity during the first quarter was less than 20% of 2019 levels. In other words, the group — which owns British Airways, Iberia, and Aer Lingus — is flying roughly one in five of the flights it operated in 2019.

Forecasts for April-June suggest that passenger capacity will increase to around 25% of 2019 levels. Understandably, CEO Luis Gallego is calling for governments to relax flying restrictions.

Mr Gallego says he’s “absolutely confident that a safe re-start to travel can happen”. But for this to be possible, governments need to set up travel corridors and scale back costly quarantine and testing regimes.

I can imagine his frustration. But what’s interesting to me is that the market is already valuing IAG at pre-pandemic levels.

IAG share price: higher than it looks

A quick glance at the IAG share price chart tells me that the stock is changing hands for about 205p as I write. In early January 2020, the price was 625p.

From looking at these two numbers alone, it might seem like IAG is still cheap enough to be a strong recovery buy. However, these numbers don’t tell the whole story.

In September last year, IAG raised €2.7bn by selling 3bn new shares in a rights issue. This took the group’s total share count from 2bn to almost 5bn.

The company has also increased its borrowing over the last year, to make up for lost income.

Adding together the value of all IAG’s shares and its net debt gives me the company’s enterprise value. This metric is often used to value businesses for sale.

My sums tell me that IAG’s enterprise value today is about £20bn. In January 2020, it was around £16.5bn. So IAG is more expensive today than it was before the pandemic.

What I’m doing now

IAG has made some changes that could help it become more efficient and profitable in the future. British Airways has retired its fleet of 747s, for example. These older aircraft use more fuel than modern long-haul airliners.

However, forecasts from the air industry body IATA suggest that air traffic levels won’t return to 2019 levels until 2024. Given this, I can’t see any reason why I’d want to pay more for IAG today than I would have done before the pandemic.

In my view, IAG shares are already fully priced for recovery. I don’t see much upside from current levels, so I won’t be buying.

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Roland Head 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.

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