The latest results for International Consolidated Airlines (LSE:IAG) came out at the end of July. The half-year figures were positive, with growth in a number of key areas. Since the pandemic pressure has eased, IAG shares have also lifted. In fact, over the past year, the stock is up 40%. Yet there’s something in the latest report that doesn’t quite add up for me.
Before and after Covid-19
The warning sign I’ve spotted relates to the business before and after the impact of the pandemic. Let’s rewind to 2019, the last full financial year before Covid-19 hit. The share price started the year close to 600p, and although it was volatile throughout the 12 months, it finished the year around 560p.
For the full-year, IAG posted a profit after tax of €1.7bn. Given the trading updates throughout the year, investors valued this kind of performance with a share price in the 500p-600p range. So far, so good.
In the latest half-year results, the business has swung to a profit after tax of €921m. This is much better than the loss of €654m from the same period last year.
If I extrapolate this further forward, I’d say that a full-year profit of €1.8bn-€2bn is realistic. This ties in with the guidance from the company that it expects to be at 97% capacity of pre-pandemic levels by the end of 2023.
Yet here’s the kicker. IAG shares are currently at 168p. This is a far cry from the 500p-600p levels from 2019 when the company made less money than it had forecasted to make this year. This isn’t a good sign.
Noting caution on the comparison
I accept that the business isn’t in exactly the same position as it was back in 2019. The price of commodities such as jet fuel is higher. General inflation levels currently add another level of complexity to costings.
The new share issuance in 2020 via a rights issue also had the impact of lowering the share price. Therefore, it’s impossible to overlay 2019 and 2023 perfectly as there are key differences to take into account.
Still not convinced
From my perspective, even compensating for a generous margin of error, there’s a stark difference in the share price between pre and post pandemic. I think this partly reflects that investors are much more cautious about the business than just a few years back.
This is important because some investors might be tempted to buy the stock with the aim of it reaching 500p again. Yet if the profitability and capacity are now back close to the 2019 levels and we’re nowhere near 500p, I simply don’t see how it’s going to reach that on the current trajectory.
We’d need to see something spectacular in the coming couple of years to propel the share price that much higher. Yet the business has flagged up the negative “potential impact of geopolitical and macroeconomic volatility on the price of fuel and consumer confidence, as well as the impact of… strikes”. So it’s unlikely the outlook is going to be plain sailing.
In short, I feel the results are a warning sign for investors to set more realistic expectations for where the IAG share price could trade from here.
