On the face of it, the IAG (LSE: IAG) share price looks to be one of the market’s cheapest airline stocks.
As a value investor, I am always on the lookout for undervalued equities. IAG has been on my radar for some time.
However, as the coronavirus pandemic has rumbled on, it has been hard for me to place a value on the shares. Now the clouds are clearing for the airline industry, I have been taking a closer look at the business.
Undervalued equity
It is quite tricky for me to place a value on the IAG share price as the company is still losing money. It is expected to turn a small profit next year, assuming there are no unforeseen developments.
Based on these projections, IAG is trading at a forward price-to-earnings (P/E) multiple of 21. Compared to its peer Wizz Air (LSE: WIZZ), this looks expensive. The latter is selling at a 2022 P/E of around 18.
Still, easyJet (LSE: EZJ) is selling at a forward P/E of 32. On this basis, the larger airline looks to be the better buy.
This problem with using these projections is the fact that they are only really just estimates. There is no guarantee any of these companies will hit the City’s growth targets for the next two years.
Challenges such as a rise in coronavirus cases and higher fuel costs could all hurt these firms in the years ahead. Environmental concerns may also hurt demand for their services.
Therefore, I think I should also consider all three companies’ current trading performance and valuation. To do this, I am going to use the price-to-sales ratio (P/S). As all three firms are losing money, the P/S offers a way to value these businesses based on revenues, not profits.
On this metric, IAG certainly looks to be the cheapest stock. It is selling at a P/S ratio of two, compared to five for easyJet and nearly eight for Wizz.
IAG share price headwinds
There are a couple of other factors to consider here. IAG and easyJet have both struggled to keep the lights on over the past 18 months.
They have had to raise vast amounts of additional capital from investors and their banks. As Wizz entered the crisis with a cash-rich balance sheet, it has fared better financially.
As such, I do think Wizz deserves a higher valuation. Further, Wizz is planning a growth spurt over the next few years. After placing an order for 102 additional fuel-efficient Airbus A321 aircraft last week, it now has more than 400 new planes on order.
So, while IAG might look cheaper using the P/S ratio, Wizz looks to me to be the better buy when I factor in its potential growth over the next few years.
With this being the case, if I had to choose between Wizz, IAG, and easyJet, I would buy Wizz for my portfolio today.
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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