International Consolidated Airlines Group (LSE: IAG) has just reported a record €7bn loss for 2020. The outlook remains uncertain for the airline group and although IAG’s share price has doubled since the start of November, the stock is still down by 50% on a year ago.
However, I’m pretty certain British Airway, Iberia and IAG’s other airlines will survive the pandemic-induced downturn. I don’t think people are going to stop flying.
With the vaccine rollout gathering pace and infection rates falling, I’ve been wondering whether I should take a fresh look at IAG shares.
Is the worst over?
I expected IAG to report terrible numbers for 2020. And they’re bad. Revenue fell by 69% to €7,806m last year, leading the group to report an after-tax loss of €6,923m.
These numbers are historic, though. They represent something that’s already happened. If flying returns to normal later this year, then by 2022 we could see IAG trading profitably again.
Indeed, broker forecasts suggest the airline group could report a €1.1bn profit in 2022. This may be why IAG’s share price is up by 7%, at the time of writing.
Why I’m worried
Although the group’s losses may be in the past, they’ve left a mess. IAG’s net debt rose by 30% to €9.8bn last year, as the group borrowed money to survive. That’s bad enough, given that profits are expected to be lower for a couple of years, even after life returns to normal.
Unfortunately, I think IAG’s debt levels are likely to continue rising over the next 12-18 months. IAG has been keeping costs under control by furloughing staff and parking aircraft. But I think the time will come soon when the company has to start spending, even if flying is still disrupted and unprofitable.
Luckily, there’s no shortage of cash. IAG has secured more new funding than it needs and claims to have €10bn of “liquidity”. That’s banker-speak for cash and unused debt.
The only problem is that this debt will have to be repaid at some point. I suspect getting IAG’s finances under control will occupy management for several years. I also have another big worry about the stock’s valuation.
IAG share price: cheap enough to buy?
Let’s wrap this thing up. I’m confident people will fly again, and I believe IAG’s main airlines will make a good recovery. Should I buy IAG shares? My decision depends on valuation.
At a share price of 195p, IAG is trading at just 2.9 times 2019 earnings. That seems cheap. But it’s not accurate. Back in September, IAG raised €2.7bn by selling new shares. This increased the total number of IAG shares in issue from 2bn to almost 5bn. That will affect the airline’s earnings per share in future years. Even if profits return to 2019 levels, earnings per share will be much lower.
My sums suggest today’s IAG share price of 195p is equivalent to a share price of 486p before September’s fundraising. That’s close to the all-time high of 495p seen in 2018.
At this level, IAG shares are too expensive for me. I’ll be staying away unless IAG’s share price moves significantly lower.
