International Consolidated Airlines Grp (LSE: IAG) announced this morning that Qatar Airways has taken a 9.99% stake in IAG, which owns British Airways and Spanish airline Iberia.
This isn’t the precursor to a takeover bid, as EU law requires European airlines to be majority owned by EU shareholders. However, the purchase does seem to be a vote of confidence in IAG’s management, and like IAG’s takeover bid for Aer Lingus, highlights the long-running trend of consolidation in the airline industry.
IAG shares have climbed by 15% so far in 0215, and by 233% over the last three years. The shares are now flirting with all-time highs — is IAG still a buy?
High expectations
The answer to this question may depend on whether you buy companies for their historic track record or their forecast growth.
Looking ahead, consensus forecasts suggest that IAG’s earnings per share rose by 89% in 2014, and will rise by a further 52% in 2015, taking them to €0.62 per share.
On this basis, IAG looks cheap, trading on a 2015 forecast P/E of 12.
Looking back, however, IAG’s record has been decidedly mixed since its creation in 2011. Assuming that we can rely on 2014 forecast earnings of €0.41 per share, IAG’s average adjusted earnings per share since 2011 are around €0.20, putting the shares on a historic P/E of 36.
Admittedly, IAG has had to contend with strike action, high fuel prices and the costs and complexity of consolidating and restructuring two large airlines during that period.
What’s more, the firm’s performance during the first nine months of 2014 was impressive: passenger revenue rose by 9.2%, and operating profit before exceptional costs doubled, from €657m in 2013, to €1,130m in 2014.
IAG could deliver
Unusually for me, I’m willing to give IAG the benefit of the doubt. I believe that the firm’s recovery and growth has not yet peaked and that there could be more to come.
IAG’s December traffic statistics show that passenger numbers were 10.8% higher in December 2014 than during December 2013, while fuel costs should have fallen further, after declining by 7.5% during the third quarter.
If IAG’s bid for Aer Lingus is successful, and CEO Willie Walsh manages to integrate the Irish airline effectively as he has done with British Airways and Iberia, then IAG could still have significant growth potential.
Buy IAG
IAG remains a buy, in my view, although if your stake in IAG has become a large part of your portfolio, you may want to look at taking some profits in order to rebalance your holdings.