Judging by the elevated volume of trading in the shares since its crash, International Consolidated Airlines (LSE: IAG) is attracting a lot of interest in the investing community.
Indeed, the Covid-19 crisis spectacularly sprung the trapdoor from beneath the airline industry. And IAG plunged into a tailspin dive along with other operators such as Dart, easyJet and Wizz Air Holdings.
The IAG share price isn’t flying
But unlike Wizz Air, for example, all the buying and selling has so far failed to cause the IAG share price to maintain any elevation from its spring lows. At 132p, you’ve got to look back the biggest part of 10 years to see the stock at levels like this. So, is IAG a once-in-a-decade bargain or a value trap? It seems clear that well-known super-successful investor Warren Buffett might label it a value trap. He famously dumped all his holdings in airline stocks when the crisis first hit the markets.
That move surprised many because Buffett is known for loading up with shares every time there’s a crisis that takes the markets down. But the crucial part of Buffett’s strategy is he pays a great deal of attention to the underlying quality of the enterprises backing up the shares he buys. He’s always looking for high-quality businesses selling at fair prices. The truth is, Buffett knew very well that airlines make poor-quality, cyclical businesses. He’d written about it many times over the years.
The fact he was holding airline stocks in the first place, he now appears to chalk up as one of his many investing mistakes. As an aside, I find it tremendously encouraging that the world’s most successful general investor can keep making mistakes and still come out on top. His execution tactics clearly work, and there’s hope for us all!
A collapse in revenue with recovery potential
Meanwhile, IAG grounded most of its aircraft in the second quarter of the year with just a small programme of passenger flights for essential travel and repatriation. Revenues, cash flows and earnings were all devastated. And the company became embroiled in a fight for survival.
The latest move in that struggle came with the September announcement of a capital increase to raise gross proceeds of €2,741m. The move will increase the share count by around 60% and represents massive dilution for existing shareholders. The share price plunged further on the news because the new shares will be around 36% cheaper than the share price at the time of the announcement.
But IAG needs the money. The funds will allow it to strengthen the balance sheet and reduce leverage. The directors reckon the enhanced liquidity will help IAG withstand a more prolonged downturn in air travel based on the firm’s own stressed, downside scenario planning. And on top of that, the funds will provide the operational and strategic flexibility to take advantage of a recovery in demand for air travel.
But Warren Buffett reckons he has no idea what the airline industry will end up looking like. And I think there’s a fair chance we’ll never see take-up of air travel at the levels pre-Covid-19. There’s bound to be recovery potential in the stock now that it’s on the road to being refinanced, but because of the poor-quality characteristics of the industry, I’d rather invest elsewhere.