Image source: International Airlines Group
I International Consolidated Airlines Group (LSE:IAG) traded at £2.06 on Tuesday (1 October). As I write, it’s £1.93 – down almost 7%.
Things were looking good for the UK corporate boss as demand for travel was showing encouraging signs. But things have taken a turn for the worse in the past few days.
News
The news that Iran has attacked Israel is bad news for many reasons, many of which have nothing to do with investing. But it also sent oil prices higher, presenting a problem for airlines such as IAG.
Fuel is one of the company’s biggest expenses. Furthermore, it’s another business that can’t do much about it directly – prices are far beyond their control.
The airline can try to fix this by raising prices for customers. But that comes at the risk of making them look for cheaper alternatives, or rethink their travel plans altogether.
Oil volatility is a business risk. But with stocks down because of the sudden rise in oil prices, investors may be wondering if that risk is now worth it.
Cycling
With a price-to-earnings (P/E) ratio of less than 5, the stock looks cheap relative to all other currencies. FTSE 100. But things are not so straightforward.
IAG’s earnings are on a big cycle. And when the economy is bad, it doesn’t just drop 10% – it can drop more than 100%.
IAG earnings per share 2014-24
Created in TradingView
The Covid-19 pandemic is a good example of this. But while this is (hopefully) likely to be a one-time event, there is much more that could affect airline earnings.
This means that it does not necessarily mean that the stock is cheap because it trades at a low P/E ratio. A stock may be expensive when earnings are at a cyclical high.
Measurement
In evaluating IAG shares, I’m looking for something that gives me a solid sense of how much the stock is worth. And I think the price-to-book (P/B) ratio is a good metric to use.
While the airline’s profits have fluctuated, its book value – the difference between its assets and liabilities – has been relatively stable. So how do things look from this point of view?
IAG P/B ratio 2014-24
Created in TradingView
IAG’s P/B ratio has fluctuated over the past 10 years, reflecting the volatility of the company’s stock price. But it’s looking at the low end of the range for now.
In other words, I think the stock is as cheap as it has been in recent times. So for investors interested in the underlying business, this could be a good time to look.
Is this a buying opportunity?
Investing in cyclical stocks when the market adjusts to near-term issues can be highly rewarding. And the threat of higher fuel costs is a good example of this for an airline like IAG.
Working where these companies are cheap is not always easy. The P/E ratio can be very misleading with businesses that often make losses when things take a turn for the worse.
The recent decline, however, has put IAG’s share price below its normal trading range. But that doesn’t mean it won’t continue from this point.
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