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I’d buy IAG shares today then buckle up for a bumpy ride

Harvey Jones
·3-min read
Economic Uncertainty Ahead Sign With Stormy Background
Economic Uncertainty Ahead Sign With Stormy Background

While I’m a big fan of buying FTSE 100 stocks on bad news, investing in International Consolidated Airlines Group (LSE: IAG) shares has been too much of a gamble for me this year. The colossal uncertainty hanging over the airline sector is a risk too far, for all but the bravest investors, I feel.

Those who did bet on IAG shares will be celebrating right now, as its share price rebounds. It ended yesterday 25.48% higher, as news of Pfizer’s vaccine success brought the return to international flying a lot closer (or so we all hope). Impressively, the British Airways owner is up another 5% today, at time of writing, as the party spirit bubbles over into a second day.

So have I missed out on a great buying opportunity? The answer is yes, but I don’t despair. I think we still face an uncertain, virus-hit winter and this should give me plenty of opportunity to buy IAG shares at a bargain price.

This FTSE 100 stock is cheap today

By conventional valuation metrics, IAG shares are cheap today. They have fallen by around three quarters, year-to-date. Right now, the P/E ratio stands at just 1.2 times earnings (although it was only 4x or 5x times before the crisis).

Do not underestimate the damage inflicted on IAG and other carriers this year. Airlines have had to ground fleets, while continuing to cover huge servicing costs. Revenues have plunged, dividends have been wiped out, and customers refunded. In the third quarter, IAG posted a loss of €1.3bn. This level of carnage is not quickly reversed.

Normally a low oil price would be good for profits, but that doesn’t apply when planes aren’t fuelling. Today, Morgan Stanley acted to calm vaccine euphoria, warning that plenty of liquidity is required in 2021 for IAG shares to fly.

IAG also had to raise funds, but at least there was good news here. Investors snapped up its £2.5bn rights issue, with demand exceeding supply. Any investor who believes in the long-term potential of IAG shares isn’t the only one, it seems.

I’d buy IAG shares for the long haul

Right now, IAG shares look to me like a bet on whether Pfizer’s vaccine will work, which isn’t a done deal. The tests haven’t yet been peer-reviewed. Vaccines have to be manufactured and distributed. They must be kept in temperatures of minus 70°C. We do not know how long protection lasts.

Even if all goes well, it may be spring before we start to see the light at the end of the tunnel. On the other hand, people will be rushing to book flights the moment they can, judging by this summer, and forward bookings data could lift IAG shares higher.

I don’t have direct exposure to the airline sector, and would consider buying IAG shares today. They still look cheap but I would treat it as a long-term buy-and-hold. The next few months still look bumpy to me.

The post I’d buy IAG shares today then buckle up for a bumpy ride appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020