In the past year, the International Consolidated Airlines (LSE:IAG) share price has fallen by 43.4%. Over this period, the move has been lower and lower, without any real rally to speak of. Even though I think the outlook for the company has improved in recent months, it hasn’t translated to a move higher for IAG shares. So what’s going on here?
Reasons for the fall
From my point of view, not all of the reasons for the falling share price are directly to do with the business. In fact, one of the key elements to the fall in the past month is down to poor market sentiment. Investors have once again been spooked by concerns about high inflation and low economic growth in the UK. For example, on Tuesday it was revealed that UK GDP for April actually fell by 0.3%.
This negative news weighs on International Consolidated Airlines Group shares as investors sell risky stocks and buy defensive stocks instead. It’s tough to argue with this logic. Would I rather own a struggling airline operator or a utility company right now? I’d be tempted to answer with the latter.
Another reason for the fall in the IAG share price is the expectation of higher costs due to rising jet fuel prices. This isn’t the fault of the management team, but is still a concern for a potential investor like myself. Higher oil prices are filtering through to the sector. With a higher cost to operate, the business will need to increase revenue by the same amount just to breakeven.
Why we could be near the end of the fall
Despite the risks mentioned above, I do feel that the end of the fall could come soon. For example, the market capitalisation can’t get too disconnected from the actual value of the company.
Currently, the market capitalisation of International Consolidated Airlines Group is £6.21bn. But the enterprise value stands at £16.15bn. The enterprise value measures the worth of a business, including cash and debt. It should work out to be similar to the market capitalisation of the firm. The clear disparity with the IAG share price indicates to me that the shares are possibly trading too low. Therefore, I’d expect any continuation of a fall to be limited.
I think the share price could stop falling later this summer when I consider the release of Q2 results at the end of July. Given the lack of operating restrictions due to Covid-19 and the consumer demand, I’d expect a positive surprise when the results come out. The number of flying hours and capacity should show signs of getting back to pre-pandemic levels. This could spark a move higher for the stock.
A tough call with the IAG share price
The risk/reward does tempt me to consider buying International Consolidated Airlines Group shares now. I think the bottom isn’t too far away, especially with what could be a bumper summer ahead. However, I’m going to sit tight and buy its shares closer to the results day in July, to buy myself some more time to watch the share price performance.