2022 has been a tough time for shares that are sensitive to the broader economy. International Consolidated Airlines’ (LSE: IAG) 18% share price decline so far illustrates the pain many cyclical companies have faced.
However, IAG’s fall this year also reflects narrower problems facing the airline industry. The question is whether the FTSE 100 stock now offers value that investors can’t afford to ignore.
The British Airways owner is expected flip from losses of 2.3 cents in 2022 to earnings of 20.1 cents in 2023. Based on these projections, I feel the airline stock offers exceptional value on paper. It trades on a price-to-earnings (P/E) ratio of just 5.8 times for next year.
Reasons to buy
There are several reasons to think IAG’s share price could spring higher again. For instance, the recovery of the commercial aerospace sector continues to improve and last week Heathrow again increased its passenger forecasts for 2022.
The airport now expects 54.4m travellers to fly from its tarmac this year. This is up from the 53m it predicted as recently as May. More upgrades could be in the pipeline too as the post-pandemic rush to get away carries on.
As a long-term investor there’s a lot I like about IAG. Its British Airways brand is a big player in the lucrative transatlantic market. I also like the company’s attempts to break into the budget airline sector.
Over the past decade the firm has added low-cost operators Vueling and Aer Lingus to its portfolio. And its abandoned takeover of Air Europa late last year shows that it still has ambition to exploit this fast-growing part of the market.
Dangers to IAG’s share price
All that being said, I still have reservations about buying IAG shares today. The business faces big dangers in the near term and beyond that include:
- Widespread strike action. As things stand around 700 IAG check-in staff are set to strike over the summer, causing many flights to be grounded. Unions are consulting with engineers and other workers at other locations over similar action.
- Ongoing staff shortages. Recruitment issues have forced the business to scale back its capacity estimates for 2022. Staffing issues could potentially scupper forecasts next year and push up its cost base.
- New Covid-19 lockdowns. Global coronavirus cases have risen sharply over the past month. A fresh explosion could potentially cause another grounding of the aviation industry. This is particularly worrying given IAG’s €11.6bn net debt pile.
- Huge competition. Many airlines went out of business at the height of the pandemic. But IAG still operates in a highly-competitive environment and profit margins therefore remain thin.
The verdict
There’s no doubt that IAG’s share price is ultra cheap. However, I believe that the firm’s low valuation is a sign of the significant risks it has to address over the near term and beyond. I think investors should buy stocks with better growth prospects today.