The International Consolidated Airlines (LSE: IAG) share price has been gaining in the past few months. But it’s still down more than 75% in five years.
Risky business
Let’s get one big risk out of the way.
Airline stocks can be very volatile, for a number of reasons. And they’re mostly down to the nature of costs.
Most of them, like fuel, airport service costs, and salaries, are largely outside of a company’s control. And with the intense price competition in the industry, profit margins can be tightly squeezed.
Saying that, plenty of investors have done well from airline shares, even if the rewards are often cyclical. So what about IAG, the owner of British Airways and Iberia?
Recovery started
For me, it’s all about the speed of the firm’s recovery, and whether it will be sustainable. Oh, and the state of the balance sheet.
And judging by Q1 results, things are going better than I’d expected at this stage. Revenue in the first quarter climbed 71%, and the company recorded a modest operating profit of €9m.
Net debt is a bit high at €8.4bn, but overall liquidity looks strong.
IAG reckons capacity for the full year should reach around 97% of 2019 levels. And it expects operating profit, before exceptionals, “higher than the top end of our previous guidance of €1.8bn to €2.3bn.“
So are IAG shares a screaming buy, then? For me, it comes down to the balance of valuation and risk.
Valuation vs risk
Forecasts put the stock on a price-to-earnings (P/E) ratio of only about 7.5, about half the FTSE 100 average. But if we adjust for debt, the equivalent P/E for the business with debt paid off would be around 14.
That should come down in the next two years, though, as profit looks set to grow.
Analysts expect the dividend to come back too. But I think it’s too early to see IAG as an income stock just yet, so I’d look elsewhere for dividends.
On top of the usual airline industry risks, there are some exceptional dangers right now. They come down to “volatility in the geopolitical and macroeconomic environment,” in the words of the IAG board.
Those are big words. But they just mean we face a badly messed up world right now. And it could still take some time to straighten out.
I might buy
Saying all that, I’m actually tempted to buy, but only a small amount. I see an industry that’s still battered, and still facing weak sentiment. The headwinds continue to blow strongly.
In short, this looks like one of the worst times to buy airline stocks ever. But that’s often a great time for contrarians to go against the flow.
IAG is starting to turn around, but its share price hasn’t really caught up that much. And the valuation doesn’t look too rich to me.
So, I don’t see it as a screaming buy. But I’ll see how the price looks when I have my next investment cash ready.
