Shares in British Airways owner International Consolidated Airlines (LSE: IAG) have experienced quite a pullback recently. In the space of around two months, the share price has fallen from near 180p to 134p.
Is this a buying opportunity for me? Let’s take a look.
IAG shares: two reasons to buy now
There are certainly reasons to be optimistic about IAG shares, in my view.
For starters, the outlook for the travel industry is likely to improve. The last few years have been incredibly challenging for airlines. Due to Covid-19, revenues fell off a cliff. More recently, the Russia-Ukraine crisis has impacted bookings.
Things should get better though. Recently, Heathrow Airport said that at the busiest times this summer it expects passenger numbers to reach 85% of pre-pandemic levels, which is encouraging. Meanwhile, Gatwick also said it expects to achieve 85% of 2019 capacity this summer. The fact that the UK government has just scrapped testing and paperwork requirements should help. If British Airways has a big summer in 2022, the IAG share price could begin to climb.
Secondly, if we look at next year’s forecast earnings, the stock looks very cheap. For the year ending 31 December 2023, analysts expect IAG to post earnings per share of 26.2p. At the current share price, that equates to a forward-looking P/E ratio of just six. That strikes me as low. If activity in the airline industry picks up and IAG can build some momentum, I’d expect the stock to command a higher valuation.
Risks to the share price
Having said all that, I do see some major risks here.
Covid-19-related flight cancellations are one. In recent weeks, hundreds of British Airways flights have been cancelled due to staff sickness, and experts believe the problems could last for a while. This could result in a lot of lost revenue, and could slow down IAG’s progress.
It’s worth noting that last week the Civil Aviation Authority warned of cancelled flights and long queues at British airports being likely to hit consumer confidence and potentially hold back the recovery.
Another key risk is high oil prices. Fuel is a major cost for airlines, so high oil prices are most likely going to eat into profits. IAG does have some oil price hedges in place, and it should be able to pass some of the costs on to consumers via higher ticket prices. However, I’d still expect oil prices to impact profit margins, especially if they stay high for a while.
A third risk is inflation. Right now, a lot of consumers are really struggling due to higher energy and food prices. This could potentially translate to lower demand for luxuries, such as trips abroad, in the short term.
Finally, there’s the company debt pile. Looking at IAG’s most recent results, I can see that net debt at the end of 2021 was €11.7bn. With interest rates now rising, this debt is going to become more expensive to service. Higher interest payments could hit profits.
IAG shares: my move now
Weighing everything up, IAG is not a buy for me right now.
There is a chance that the share price could bounce if the group can generate some momentum this summer.
However, all things considered, I think there are better stocks for me to buy today.
