IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.

British Airways Airbus A320neo © Nicolas Economou/NurPhoto via Getty Images
BA’s passenger numbers may not regain pre-crisis levels until 2023
(Image credit: British Airways Airbus A320neo © Nicolas Economou/NurPhoto via Getty Images)

At the start of the crisis in March I suggested investing in International Consolidated Airlines Group (LSE: IAG), the owner of British Airways. Those who took my advice would have endured a bumpy ride.

The shares surged to 330p before falling back to 155p in early August, meaning that you would have had to close the position at the adjusted stop-loss of 200p. The stock is now at 216p, slightly below where it was when I first tipped it in March. Despite the roller-coaster ride, I think it is time to give the airline group a second chance.

One of the key reasons why IAG’s shares have done so badly is that the travel restrictions and border closures imposed by most governments in order to combat the virus have lasted longer than many people initially predicted.

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Although there was a brief resurgence in travel during the summer, as people went on their holidays, this has faded away, with many governments reimposing restrictions in order to reduce the chances of a second wave of the virus in the autumn.

Airlines face strong headwinds

Many experts worry that the industry’s problems could persist even after the crisis ends, with many business trips and conferences carried out online. At the very least, many firms may simply decide that travel budgets are an easy target at a time when many of them are facing sharply reduced profits, or even struggling to stay in business.

IAG’s management is deeply pessimistic. CEO Willie Walsh thinks that the number of passengers using BA may not return to pre-crisis levels until 2023. The company also plans to issue more shares to raise cash to see it through the crisis. As a result, existing shareholders will see their holdings diluted by as much as 50%.

All this looks very bleak. However, there are several reasons to be cheerful. Firstly, most experts agree that there is a good chance that we could see a vaccine by the end of the year, which could see a permanent end to the crisis. Next, similar predictions about the end of business travel were made after the terrorist attacks in 2001 and Sars in 2002-2003, only for it to bounce back.

While the rights issue is not good news for shareholders, it at least reduces the risk of IAG being pressured into accepting a government bailout, which would inevitably come with an equity stake.

Perhaps the best reason to buy into IAG is its valuation. The shares have rallied by nearly 40% from their August lows, but still trade at just two times 2019 earnings, which looks cheap even if shareholders’ holdings are going to be diluted or the recovery in business travel takes longer than expected. I recommend that you buy IAG at the current price of 206p at £15 per 1p. With a stop-loss at 140p, this gives you a total downside of £990.

How my tips have fared

The last four weeks have seen a mixed performance by my three long tips. Royal Dutch Shell produced better second-quarter earnings than many analysts expected, but the oil giant’s shares fell from 1,179p to 1,086p.

Even though it is set to be removed from the FTSE 100, media group ITV remained steady at 58p. Industrial and construction equipment group United Rentals appreciated from $160 to $177, thanks to an unexpectedly good earnings report.

My three long tips are making a collective profit of £1,301 owing to the £2,484 in profits from United Rentals.

My three short tips have also gone in different directions. Electric-truck maker Nikola increased from $36 to $40, thanks to an announcement that it will sell 2,500 trucks to a waste-disposal firm.

Exercise-bike manufacturer Peloton also rose, from $72 to $76. However, online insurance-broker eHealth fell from $68 to $63 amid concern that the number of people cancelling policies is increasing.

Shares in online education provider GSX Techedu declined from $91 to $85, although it hasn’t fallen below the $70 at which I suggested you start shorting. My short positions are making a total profit of £1,172.

Counting International Consolidated Airlines Group, I now have four long tips and three short ones, which is a reasonable balance. Given that my tip on Royal Dutch Shell is making a loss after nearly six months, I will be keeping an eye on it with a view to closing it soon unless things improve.

I also suggest that you raise the stop-loss on United Rentals to $150 and cover your position on eHealth if it reaches $100. As for the other positions, stick with them.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri