The International Consolidated Airlines Group (LSE: IAG) share price has risen by 65% over the last month. Investors have been buying into the owner of British Airways in the hope that new vaccines will bring the coronavirus pandemic to an end quickly next year.
However, airline industry forecasts suggest it could take until 2023 for passenger numbers to return to 2019 levels. Should I really be buying IAG shares with such an uncertain outlook?
Good news
I can see some reasons to be positive about the outlook for IAG. Major downturns often force businesses such as these to focus most closely on costs and efficiency. One example of this is British Airways’ decision to retire all of its Boeing 747s.
Much as I like and respect this famous model, I’ve been flying on them since the early 1980s. Modern planes use less fuel and offer a number of other improvements in passenger experience and safety. Changes such as these should help IAG to emerge from this crisis with a greener and more modern fleet.
Another positive is that the airline has already raised extra cash from shareholders. I believe that September’s jumbo €2.7bn fundraising will support IAG’s operations until it’s able to return to normal flying.
What should I worry about?
The large number of new shares issued this year means that IAG’s earnings per share would be much lower than in 2019, even if profits were the same as in 2019. For this reason, I don’t expect IAG’s share price to return to historic levels for the foreseeable future.
A second concern for me is that raising money from shareholders became necessary because the group’s debt levels had reached an uncomfortable level.
Despite an increase in debt, IAG’s own forecasts show that it expects to cut capacity by 27% in 2021, compared to 2019. Broker forecasts for next year suggest that the group’s revenue will fall to €14.5bn, compared to €25.5bn in 2019.
I think it’s fair to assume that IAG’s profits are likely to remain below 2019 levels for at least a couple of years.
IAG share price: high enough already?
One common way to value a company is by adding its net debt to the market value of its shares. This gives a figure known as the enterprise value. It’s the amount someone buying the whole business would have to pay, including debt.
My sums suggest that IAG’s enterprise value is around £15.5bn today. That’s almost the same as one year ago, according to my calculations. The problem is that IAG’s expected sales and profits are much lower than they were one year ago.
In other words, I think IAG shares might actually be more expensive than they were in November 2019.
In my view, IAG’s share price already reflects the partial recovery I expect to see next year. Although I think there probably are further gains to come for long-term investors, I suspect the airline group will need to prioritise debt repayments when trading does improve.
IAG shares don’t look cheap enough for me. I can see better buys elsewhere, with fewer risks. I won’t be adding this airline stock to my portfolio just yet.