International Consolidated Airlines (LSE: IAG) has suffered more than most companies during the pandemic. The airline group, which owns British Airways, was severely disrupted when Covid halted the travel market. But could things be turning a corner for this FTSE 100 stock? Restrictions are easing in the UK, so there could be a lot of pent-up demand for holidays abroad this year.
Let’s take a look to see if I should buy the shares.
The investment case
International Consolidated Airlines, or IAG, released its third-quarter results in November and the CEO said a “significant recovery was under way”. He followed by saying: “We continue to capitalise on surges in bookings when travel restrictions are lifted”.
However, this was before Omicron started to spread. Does this mean further restrictions in 2022 for international travel?
Well, according to the UK government just last week: “2022 is the year in which restrictions on travel, lockdowns and limits on people’s lives, are firmly in the past.” It further laid out plans to ease travel restrictions, which should be a huge boost for IAG.
Growth forecasts for the next two years certainly reflect this. City analysts expect revenue to grow by 132% in 2022, and by 23% in 2023. What’s more, earnings per share (EPS) are expected to rebound into positive territory this year (albeit only to 92 cents). However, in 2023, EPS is forecast to reach 254 cents. Based on a forward price-to-earnings ratio for 2023, the IAG share price is rated on a multiple of 7. This does look cheap, although it’s in line with pre-Covid valuations.
Is this FTSE 100 stock a buy?
Things are certainly looking up for IAG. Fewer travel restrictions and a surge in holiday bookings should boost revenue growth this year and next. But will this make the share price explode?
I’m not so sure. After all, a share price is primarily used to determine the market value of a company. Simply times the share price by the number of shares in issue, and that’s the value of a company. For IAG, its current market value is £7.7bn based on today’s share price. Back in 2019 (pre-Covid), IAG’s market value was £9.7bn. That’s 26% higher than today. It would be a decent return for me, but not exactly explosive.
However, this time back in 2019, the share price was as high as 430p, which is 179% higher than today’s share price. Now that really would be an explosive share price rise!
The reason for the difference in potential returns is due to IAG issuing new shares during the pandemic. The company raised €2.7bn to strengthen its balance sheet and reduce leverage. It was sensible at the time, given the circumstances. But it does mean the share price is unlikely to rise to pre-Covid levels any time soon due to the dilution of the share count.
In addition, even though revenue is expected to grow significantly in the next two years, it would still be under the revenue IAG achieved in 2019.
So, for now, I’m not going to buy shares of IAG. The recovery looks promising, but I think the current share price reflects the growth ahead. Therefore, I don’t see it exploding from here. I think there are better FTSE 100 companies to buy today.
