The International Consoldated Airlines Group (LSE:IAG) share price has exploded in recent months. It’s been driven by a variety of positive industry updates that show a breakneck recovery in air travel.
Yet at current prices it still looks like one of the FTSE 100’s top value stocks. City analysts think the company’s earnings will rocket 260% year on year in 2022. This leaves it trading on a forward price-to-earnings (P/E) ratio of 10.5 times, well below the FTSE index average of 14.5 times.
But are IAG shares really a bargain? Or is this a high-risk share that investors should avoid at all costs?
Revenues take off
The British Airways owner’s financial statement on Friday showed that the the business is in a good place right now.
It swung to an operating profit (excluding exceptional items) of €1.2bn last year from a €3bn loss in 2021. Revenues almost tripled to €23.1bn as capacity improved to 87% of 2019 levels by the fourth quarter.
IAG is predicting further strong progress in 2023 while being “mindful of uncertainty in the macro environment” as well as cost inflation. It’s expecting comparable operating profit to range between €1.8bn to €2.3bn for the full year.
This wasn’t the only exciting news to come from IAG, either. It also announced the acquisition of the 80% stake it didn’t already own in Spanish carrier Air Europa for €400m.
The deal gives the company further exposure to the fast-growing budget segment which it already serves with Aer Lingus and Vueling. It also provides better access to Latin America, where soaring personal wealth levels are expected to supercharge travel demand in the coming years.
Big debts
IAG’s turnaround is making terrific progress, then. But I think the FTSE share still faces many challenges that make it an unattractive investment.
My chief concern is that the business still carries high debt levels. Net debt fell in 2022. But it still clocked in at a whopping €10.4bn as of the end of December. The acquisition of Air Europa, while a good fit strategically, will add further weight onto the pile as well.
These elevated debts could affect IAG’s ability to pursue growth opportunities elsewhere. It might also affect the timing of dividend resumption if trading conditions worsen. The level of shareholder rewards and the rate of future dividend growth may also be affected.
Indeed, City analysts think the business will start things off with a dividend of 2 euro cents per share in 2022. This creates a yield of just 1.2%, well below the FTSE 100 average of 3.5%.
The verdict
Having such high debts is particularly dangerous given the uncertain trading outlook.
Sure, passenger numbers have exploded over the past year. But there’s a big question over whether ticket sales will keep booming as pent-up travel demand eases and the cost-of-living crisis endures. IAG also has to wrestle with rising wage inflation, severe competitive pressures, and another possible surge in fuel costs.
While IAG shares are cheap, I think there are more attractive FTSE 100 value stocks for investors to buy today.
