Shares in British Airways owner IAG (LSE: IAG) have crashed recently and that’s got UK investors interested in the stock. Last week, IAG was among the top 10 most purchased stocks on Hargreaves Lansdown.
Is this one I should buy for my own portfolio? To answer that question, I’m going to run the stock through the checklist I use to identify top long-term buys. This has helped me find winners such as Apple and Microsoft. Let’s see how IAG stacks up.
Should I buy IAG shares today?
The first thing I do is look at the industry it’s in. I like to invest in companies that are well positioned within growth industries. Industry growth tends to provide nice tailwinds.
The travel industry looks set for growth in the long run, in my view. The retirement of the Baby Boomers (who love to travel), rising wealth in emerging markets, and advances in booking technology should all drive growth. According to Research and Markets, the global passenger air transport market is expected to grow from $525bn in 2021 to $657bn in 2025 (annualised growth of 6%). So IAG passes the test here.
Is IAG an industry leader?
The next thing I do is look to see if the company has a competitive advantage. This can protect a company’s profits.
Here, IAG struggles. It faces intense competition from a number of other players and there’s nothing to really stop customers switching to a competitor.
The third step in my process is to take a deep dive into the financials. I like to invest in high-quality businesses that:
Have a good track record in terms of revenue and earnings growth
Are financially sound (low debt)
Are consistently very profitable (high return on capital employed (ROCE))
Here, IAG doesn’t do so well. Between 2016 and 2019 (pre Covid-19), net profit declined 11%. Meanwhile, at 30 June, net debt stood at €12.1bn, which is high.
And while ROCE was reasonable in the lead up to Covid-19, it was terrible last year, at -40%. Investors could argue that the Covid-19 pandemic was a rare event. However, other companies in the travel industry performed much better. Hotel operator IHG and booking specialist Booking Holdings had ROCE figures of -5% and -4% respectively.
Are IAG shares cheap?
Finally, I look at the valuation. Currently, analysts expect IAG to generate earnings of 11.5 euro cents next year. So, at the current share price of 150p, the forward-looking P/E ratio is about 15.
That seems about right for a company like IAG. So I wouldn’t say its shares are cheap.
IAG: my move now
Putting this all together, I don’t see IAG as a good fit for my portfolio. The stock simply doesn’t look like a long-term winner to me.
Of course, IAG’s share price could bounce from here. If we see some encouraging news in relation to international travel, the stock could jump in the short term.
However, as a long-term investor, I’m looking for more than short-term gains. I’m looking for stocks that I can hold for a decade or more and make five, 10, or 20 times my money.
Looking at the investment case for IAG, I think there are better stocks to buy.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Apple, Hargreaves Lansdown, and Microsoft. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has recommended Hargreaves Lansdown and InterContinental Hotels Group and has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. 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.