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He Consolidated International Airlines (LSE:IAG) share price continues to fall by 78% in the last five years. I think the market has made a mistake and I want to explain why.
First, I'll say that I don't like airline stocks in general. This is because they have no real differentiation, compete almost solely on price, and have no control over much of their costs.
It's no surprise that Richard Branson once said that the way to become a millionaire is to start with a billion and launch an airline.
Two companies
We often see a disconnect between the market-set price of a stock and the true long-term value of a stock. I mean, if I didn't believe that, I wouldn't have bought Lloyds Banking Group Share.
To show what I mean, let me compare two stocks. I'm talking about IAG and Rolls-Royce holdings.
Both depend largely on the same key element: the commercial airline business. When planes go up, airlines get their ticket prices. And Rolls-Royce makes cash from the sale and maintenance of its engines.
We have seen very well what happens to both businesses when aviation stops.
Different evaluations
But since Covid faded and bums started returning to seats, only one of these two companies has made much of a recovery.
Rolls-Royce shares are forecast to have a price-to-earnings (P/E) ratio of 31, about double that over the long term. FTSE 100 average. Meanwhile, IAG has a P/E of just 3.6.
It's true that Rolls-Royce is forecasting strong profit growth over the next three years, while IAG seems a bit stagnant.
But still, one stock being valued 8.6 times more than the other just doesn't seem right. I am convinced that the market has been wrong about at least one of these things. Possibly both.
Still risky
There is clearly still a global threat to the aviation business, and what appears to be a new conflict breaks out almost every time I read the news.
There is also an anti-competition investigation by the European Commission related to IAG's plans for Air Europa. That could cost the company money.
I also think the market will not want to value airlines too much in the future. I think we have overlooked the risks facing the industry for too long. But the last few years have really been thrown in our faces.
This is a volatile business, to be sure. And you really need to look at it with a long-term view, even more so than most other stocks.
Rating again
I often see large companies whose stock prices I think are too high. That might be true for Rolls-Royce now, but it's one I'd buy on the dips.
But there are also companies that you wouldn't normally buy, but that look really tempting when stock valuations fall too low.
I think that's what I see now at International Consolidated Airlines. And you might really buy it next time you have some cash to invest.
In the meantime, I'm keeping an eye on the fiscal year results, which will be released on February 29.
