At the time of writing, the IAG (LSE: IAG) share price is changing hands around 160p. However, before the pandemic began in February 2020, the stock traded for more than 400p per share.
As the global economy reopens, the airline group could see a substantial recovery in its sales and profitability. Could this be enough to send the stock back to 400p and double my money?
IAG share price potential
A lot has changed for the enterprise over the past two years. The pandemic decimated the corporation’s revenue, profits and balance sheet. At one point, it was selling the silverware from its fleet of 747 planes to try and raise money.
The company, which owns the British Airways brand among others, has come a long way since the depths of the pandemic. Analysts believe the group is on track to break even in its 2022 financial year.
Of course, a lot can go wrong over the next couple of years. IAG may never hit this target. Rising fuel prices and the cost of living crisis could hit the firm in the pocket. With an already weak balance sheet, if the economic situation deteriorates further, the group may have to ask shareholders for additional capital to keep the lights on.
That is the worst-case scenario. In the best-case scenario, the group will exceed City forecasts to break even in the next two years. If it can return to profit in the next three years, I think investors may be willing to place a higher multiple on the shares.
At this point, it is difficult to tell how much the market will be willing to pay for the IAG share price. As the firm is not profitable, I cannot use the earnings per share figure. This figure compares a company’s profitability to its current share price.
Instead, I can use the price-to-sales (P/S) ratio. This compares a company’s total sales figure to its price and is more useful when analysing unprofitable corporations.
Undervalued opportunity
Based on its projected figures for 2022, the IAG share price is currently selling at a P/S ratio of around 0.5. By comparison, the company’s US peers are trading at an average multiple of about 1.
These numbers imply that the stock could double from current levels as sales recover. This assumes sales do recover over the next couple of years which, as I noted above, is far from guaranteed. Unfortunately, the numbers suggest the stock only has the potential to rise to around 320p, not the pre-pandemic level of 400p.
Still, considering this outlook, I think the IAG share price has the potential to double my money over the next couple of years in the best-case scenario. On that basis, I would be happy to buy a speculative position, although I will be keeping an eye out for the challenges outlined above and their impact on the business.
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.
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