I already own IAG shares, but as a long term investor, I’d buy more at today’s price. Here’s why!
Why did the share price fall today?
Many investors in travel industry stocks will have hoped that pandemic-induced disruption would be over by now. However, that’s not the case.
So called “travel chaos” has gripped the industry. Airlines have been forced to cancel flights amid staff shortages, both in terms of cabin crew and those on the ground.
Yesterday, IAG-owned British Airways announced it was axing more than 650 July flights to Europe. The move will affect up to 105,000 passengers.
On Thursday, Heathrow airport asked airlines to cut flights because it was expecting more passenger numbers than it can currently cope with. Some 30 flights will be cut today.
The announcement from Heathrow came as Paris CDG airport cancelled around 17% of flights due to strike action by airport firefighter staff.
These events have compounded negative economic news. Household incomes in the UK fell for a fourth consecutive quarter at the start of the year, marking the longest run of declines since 1955.
Less disposable income will undoubtedly have a negative impact on travel.
Despite the negative sentiment surrounding the industry, I’m bullish on IAG’s long-term prospects.
To start with, IAG has a market capitalisation of £5.3bn, but the enterprise value stands at £16.15bn. The former takes into account the high amount of debt held by the company and the perception of the company’s prospects. However, I’d expect these two figures to be closer.
Despite declining real incomes in the UK, demand for travel appears strong. There’s clearly some pent-up demand after the pandemic put a halt to international travel. In its most recent update, IAG said that “strong customer demand is expected to drive profitability from quarter 2 onwards”.
The Airports Council International’s latest assessment suggested that the removal of restrictions has had a “positive and immediate impact on global air travel demand”. However, it noted that travel in the Asia Pacific was lagging behind the rest of the world.
Capacity is returning to pre-pandemic levels too. IAG expects capacity for Q2 to be around 80%, Q3 at 85%, and Q4 at 90% of 2019 levels. This is certainly promising news.
Heathrow even recently increased its expected passenger numbers for the year. The airport now expects 54.4m travellers to depart from the aviation hub in 2022.
And according to forecasts, IAG has a forward price-to-earnings (P/E) ratio for 2023 of just 5.8. That looks like good value to me.
Ok, so there’s no shortage of risks.
For one, there are strikes planned and maybe more ahead. Some 700 IAG check-in staff are due to strike over the summer.
The company has net debt of €11.6bn. Servicing that much debt will certainly impact profitability.
We can’t forget about Covid-19 either. The virus appears to be getting weaker, as you’d expect. But there’s no guarantee that we won’t see a more virulent strain in the coming months. That would definitely hurt air travel.
Despite this, I think the prospects outweigh the risks and I’d buy more IAG stock at today’s price.