IAG (LSE: IAG) shares have experienced a significant decline recently. Year to date, the shares are down about 30%. Over one year, they’re down more than 40%.
Is this an opportunity to pick up a well-known FTSE 100 stock for my portfolio at a great price? Or are IAG shares a value trap? Let’s discuss.
Is now the time to buy IAG shares?
There are certainly reasons to be optimistic about IAG shares. For starters, CEO Luis Gallego told investors last month that he expects all airlines within the group (British Airways, Iberia, Vueling, Aer Lingus, etc) to be profitable this year. This is a positive development. Last year, the group posted a net loss of €2.9bn. Profits are, of course, a major driver of a company’s share price.
Secondly, the stock appears to be cheap. Right now, analysts expect the group to generate earnings per share (EPS) of 17.2 euro cents for 2023. If we assume the company can achieve this forecast, the forward-looking price-to-earnings (P/E) ratio here is less than seven. That’s low compared to the broader market.
Will the IAG share price rebound?
Having said that, there is quite a bit of uncertainty here. To my mind, for the IAG share price to recover, a few things need to happen.
We need to see less disruption across the airline industry for a start. This year has been a mess in terms of delays and cancelled flights and this has hit the group’s capacity and revenues. Staff shortages have been the main problem. During the pandemic, 2.3m people left the global industry. As a result, there’s been a shortage of pilots, cabin crew, airport security, and more.
We also need consumer spending to hold up. This year, people have splashed the cash on flights after not travelling during Covid. However, it remains to be seen whether they will keep spending so much on holidays going forward. Right now, money is tight for a lot of people.
Additionally, we need to see oil prices take a breather. If the price keeps rising, it’s likely to have an impact on IAG’s profitability as fuel is a major cost for airlines.
Finally, for the IAG share price to rise, I think the group needs to show it has the capacity to pay down debt. At 30 June, net debt stood at €10,979m. This is an issue in the current rising-rate environment. It’s worth noting that my data provider tells me there’s a ‘serious risk of financial distress’ here within the next two years due to the debt levels.
My move now
Given how much needs to go right for IAG in the near term, I won’t be buying the shares for my portfolio any time soon. I’m concerned that the stock could be a value trap.
I think there are other safer stocks to buy for my portfolio today.