IAG shares are rising after today’s news. Is this now a bargain not to be missed?

Paul Summers
·3-min read
British Airways
British Airways

International Consolidated Airlines (LSE: IAG) shares were up in early trading, suggesting today’s third-quarter numbers were no worse than those expected by the market (which is really saying something!).

Does this suggest the battered airline is now a bargain? Not in my opinion.

Massive IAG loss

Despite operating more flights over Q3 than in Q2, the coronavirus continues to wreak havoc on IAG. At a little over 64% capacity, passenger revenue came in at 4.89bn over the nine months to the end of September. Total revenue dropped to just 6.57bn.

Unsurprisingly, IAG swung to a huge post-tax loss of €5.57bn for the period. Compare this to the €1.81bn profit in 2019 and you realise just how bad things are.

To make matters worse, it doesn’t look like IAG will get a respite anytime soon.

“Constantly changing restrictions”

New CEO Luis Gallego was in a combative mood, arguing that the impact of the coronavirus has been made worse by “constantly changing government restrictions.” He appealed for governments to adopt pre-departure (and post-flight) testing to “open routes, stimulate economies and get people travelling with confidence.

For its part, IAG is trying to mitigate the impact of the coronavirus by reducing costs where it can and raising €2.7bn in the market. The latter brings total liquidity to €9.3bn. Nevertheless, it’s worth pointing out the battered airline has net debt of €11.1bn.

IAG shares: cheap for a reason

Investing with a contrarian mindset can sometimes work out extremely well. Even so, I can’t help thinking that anyone contemplating buying IAG shares today in the hope of striking it rich could be in for a long wait. In fact, things could go from (very) bad to even worse in the event of a second UK lockdown.

Sure, the market may be forward-looking but today’s depressing prediction that it’ll take until “at least 2023” for demand from passengers to fully recover is sobering. With the coronavirus showing no sign of leaving quietly, the airline has already planned for capacity in its fourth quarter to be no higher than 30% compared to the previous year.

IAG shares are cheap for a reason. Before taking a punt, I suggest someone thinks very hard about how much money they’re willing to put at risk.

Better buy than IAG shares?

Also releasing a Q3 update this morning was FTSE 250 member and IT specialist Computacenter (LSE: CCC). For me, this is a far better investment at the current time.

Today’s statement, while brief, is likely to comfort those already holding. With trading remaining strong, Computacenter said it was “highly pleased” with performance over Q3. The £2.6bn-cap firm went on to say it entered Q4 with “good short-term visibility and a strong backlog of orders.” What a contrast to IAG!

Computacenter’s share price was slightly down this morning. Nevertheless, it’s been in superlative form since March’s market crash. Those buying back then would be sitting on a gain of around 150%!

Despite this massive gain, CCC still trades on a price-to-earnings (P/E) ratio of 20. That looks good value for a company that generates excellent returns on capital employed and boasts net cash on its balance sheet.

With a second lockdown looking increasingly likely, I’d much rather buy a slice of Computacenter over IAG shares.

The post IAG shares are rising after today’s news. Is this now a bargain not to be missed? appeared first on The Motley Fool UK.

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Paul Summers 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