Image source: International Airlines Group
He Consolidated International Airlines (LSE:IAG) share price is down 63% in the last five years.
While others related to aviation, such as Rolls-Royce Holdingshave returned since the 2020 stock market crash, International Consolidated remains stubbornly low.
Cheap
Forecasts put the price-earnings (P/E) ratio at just 4.5.
With the FTSE 100The long-term average P/E is up around 15, doesn't that make it look awfully cheap? Well, if the forecasts are bad, a stock may deserve such a low valuation.
But wait… they're not.
Analysts see profits falling slightly this year, but then stabilizing. If they are right, we could see IAG's P/E drop to 3.9 by 2026.
Oh, and the City folks are planning a refundable dividend, which will also increase to a 4.2% yield by 2026. Why aren't investors buying the stock in droves?
Debt
There is one thing that I think will keep many investors away, and it is a very important thing. It's debt.
At the end of the first quarter, the owner of British Airways and Iberia had net debt of 7,438 million euros (6,289 million pounds). When we take this into account, it can alter the underlying P/E value.
I estimate a debt-adjusted forward P/E of about 7.9 for the current year. And the adjusted P/E for 2026 would increase to 6.8, although that still looks attractive to me.
And this assumes that net debt will not decrease. But it has been falling, and the latest figure is 20% lower than the first quarter of 2023. If that continues, those projected valuations could start to look even better.
Headwinds
Leaving finances aside for the moment, it is clear that there is a huge barrier to airline success right now. Well, actually it's a lot of things, all the things that keep people away from airplane seats.
Inflation leaves people with less money available to spend on vacations. And then we must be careful where we go.
Anywhere near Ukraine or Russia, and parts of the Middle East… a lot of people won't want flights that go anywhere near them. General global unrest may make staying home seem like a very good idea.
On top of all that, the cost of fuel is one of the biggest drags on the industry. Oil is not cheap and it does not seem like it will fall.
Business
For years, I haven't liked the airline business, mainly because it competes only on price and has no control over most of its costs, such as fuel.
On the other hand, each stock must have a price at which it is good to buy, right? Just as even the best can become too expensive, those in the toughest businesses can surely become too cheap too, right?
That's what I think I'm seeing at International Consolidated Airlines right now.
Whichever way you look at it, the share price looks too cheap. And we saw ridership grow in this recent update.
