The IAG (LSE: IAG) share price plunged in early deals today. This decline has taken the shares back to the level last seen at the depths of the financial crisis.
However, there’s a very good reason why the stock has plunged nearly 30% today. I think this has only improved the attractiveness of the airline group to investors.
IAG share price slump
Today, the owner of British Airways, completed a fundraising. The group raised €2.7bn from shareholders by issuing new stock.
This has diluted existing investors, which means each share now represents a much smaller percentage of the overall business than it did on Friday. As such, each individual share is worth less. That’s why the stock price has fallen today.
This cash call isn’t necessarily a bad thing. It may have hit the IAG share price, but it will give the company a large financial cushion to withstand the coronavirus storm.
According to its latest trading update, at 31 August, the group had total liquidity of €7.6bn, including €5.8bn of cash and €1.8bn of “undrawn and committed general and aircraft facilities.“
With the extra €2.7bn from shareholders, IAG’s total financial resources will be over €10bn. Few other airline groups have such a strong balance sheet. Management is also taking other actions to try and stabilise the business.
British Airways is in the process of reducing headcount by up to 13,000. Meanwhile, IAG’s other European airlines are making the most of government employment schemes and are consulting on further job losses.
At present, management believes demand across the group will return to 70% of 2019 levels by 2021. That suggests the company’s earnings could make a strong recovery next year. Therefore, it looks as if the IAG share price offers a wide margin of safety at current levels.
The company has a current market capitalisation of just under €4bn. By comparison, in 2019, the group reported net income of €1.7bn. If income only returns to 50% of this level in 2021, that suggests the stock is currently dealing at a mid-single-digit price-to-earnings (P/E) ratio. I think that’s cheap compared to the business’s long-term potential.
And IAG may even surpass this forecast. Its strong balance sheet could give the group an edge over international and European peers, allowing it to take market share and grow earnings at a faster rate.
So, all in all, I reckon that now could be a good time for risk-tolerant long-term investors to buy a share of IAG. The company’s near-term outlook is uncertain, but its strong balance sheet, global footprint, and brand recognition should help the group stage a recovery in the next few years.
As noted above, if the company can return to 2019 levels of profitability, the IAG share price could produce large total returns from current levels. In my opinion, management’s decision to act quickly and strengthen the group’s balance sheet has only improved the investment case.
Rupert Hargreaves 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.