IAG (LSE: IAG) shares have been getting a lot of attention recently. It seems that investors are expecting IAG – the owner of British Airways – to benefit from the ongoing recovery of the airline industry.
This is not a stock I currently own. Should I buy it for 2023? Let’s take a look.
Performance has picked up
IAG’s recent trading updates have been relatively encouraging, to my mind.
In late October, the group told investors that for Q4 2022, it expects capacity to be around 87% of 2019 (pre-pandemic) levels. Meanwhile, for Q1 2023, it expects to hit 95% of 2019 levels. These numbers suggest passenger demand is quite strong and that the group has made a good recovery from the pandemic.
It’s worth noting that IAG’s financial performance has improved considerably of late. For Q3 2022, operating profit came in at €1.2bn. A year earlier, the group posted an operating loss of €452m.
And at the end of September, the group had cash of €9.3bn on its books. So liquidity shouldn’t be a near-term issue.
“We achieved another strong performance in the third quarter, with an operating profit of €1.2bn and liquidity of over €13bn. All our airlines were significantly profitable and we are continuing to see strong passenger demand, while capacity and load factors recover,” said CEO Luis Gallego.
So, overall, the airline operator appears to be performing quite well as we enter 2023.
Risks in 2023
I do see a few risks here that could potentially derail the company’s recovery in 2023 however.
Consumer spending is one. Right now, consumers are still buying airline tickets in droves. And they’re happy to pay higher ticket prices. This could change in the months ahead, as the cost-of-living crisis takes its toll on households’ disposable income.
“While demand remains strong, we are conscious of the uncertainties in the economic outlook and the ongoing pressures on households,” Gallego said recently.
Business travel (the most profitable segment for airlines) is another issue to consider. This is not yet anywhere near pre-pandemic levels. For Q3, IAG’s business travel revenue touched 75% of 2019 levels. If businesses are under pressure in 2023, we could see further weakness here.
Fuel prices also shouldn’t be ignored. These have been partly mitigated due to the group’s hedging policy but I’d still expect them to rise in 2023.
Finally, there’s debt on the balance sheet. At 30 September, this stood at around €11bn and could create challenges if interest rates continue to rise. The company also has a pension deficit of around £1.65bn.
Valuation
As for the valuation, analysts currently expect IAG to generate earnings per share (EPS) of 15.2 euro cents for 2023. That puts the stock on a P/E ratio of about 10 right now.
That is a relatively low valuation. However, there’s no guarantee IAG will achieve that EPS figure. The risks I mentioned above could all drag earnings lower. If they did, the stock may not look so cheap any more.
Should I buy?
Weighing up the risk versus the potential reward here, I’m happy to leave IAG shares on my watchlist for now.
There’s certainly a chance that IAG shares could perform well in 2023. However, all things considered, I think there are better stocks to buy for my portfolio today.
