At International Consolidated Airlines (LSE: IAG), the mood among investors seems very different today than a year ago. Back then, optimism was creeping back. But move forward a year, with travel restrictions all but gone, and the IAG share price is in the dumps. Since the pandemic, IAG shares have lost 84% of their value. And unlike many that have been recovering, it’s down 4% over the past 12 months. But is that depressed IAG share price presenting me with one of the FTSE 100‘s best buys right now?
A lot will depend on 2021 results, due on 25 February, but we already have some hints. At Q3 time, the company told us it had achieved 43.4% of 2019 capacity in the quarter. Compared to the 21.9% a quarter previously, and on the back of the pandemic hammering, that doesn’t look too bad at all. But compared to the levels we’ll need for a sustained IAG recovery, I found it disappointing.
IAG reckoned, at the time, that it planned to reach around 60% of 2019 capacity by the fourth quarter. We should hear how well that turned out when we see the final figures. If passenger numbers are in line with hopes, or ideally a bit better, I think we could see the share price picking up. But if the figures fail to meet expectations, the pessimism could continue.
Fundamental shift
I do think there’s been a fundamental change in the way investors are approaching the IAG share price. I see those who have been chasing the short-term ups and downs having largely moved on. And the market is getting back to examining it in terms of its fundamental valuation. For long-term investors, that has to be the only sensible approach to investing. So what does the valuation look like now?
Just prior to the Covid-19 stock market crash, the business was on an enterprise value of approximately £15.6bn. That’s what you would have had to pay at the going share price to buy the whole company and pay off its debt.
Today we’re looking at a market cap of £7.9bn, which isn’t that far below the March 2020 figure of £9.2bn. Despite the massive share price fall, the dilutive effect of issuing huge amounts of new equity has helped keep the total market cap relatively high. We won’t know the year-end debt figure until results day, so I’ll use the Q3 net debt figure of €12.4bn (£10.3bn at today’s exchange rate).
IAG share price valuation
It gives us an enterprise value for it of £18.2bn. That’s higher than it was before the crash, which seems a bit crazy to me. On the one hand, the IAG share price is down more than 80% since before the slump. And that does make it look like it could be ripe for recovery and a cracking FTSE 100 bargain. But against that, the total valuation of the company, accounting for the explosion in the number of shares in issue and its increased debt, is higher.
It’s arguable that IAG was undervalued before the pandemic, and that the price is about right now. But I think the likelihood of its being today’s biggest FTSE 100 bargain has flown right out of the window. I’ll wait, at least until we see those 2021 results, before I think further about buying.