The International Consolidated Airlines (LSE:IAG) share price is 63% down from its pre-pandemic levels. But analysts seem to think the stock’s well below where it should be.
According to TradingView, the stock’s currently 38% below the average analyst price target. So with the business starting to break clear of the effects of Covid-19, is there an opportunity for investors?
Recovery
It’s taken a few years, but IAG’s somewhere near the position it was before Covid-19. Operating margins and total debt have both recovered to where they were before the pandemic.
A key reason why the balance sheet’s in a decent position is that the company raised cash by issuing stock. As a result, the outstanding share count increased significantly – and this has hasn’t come down.
Nonetheless, earnings per share have essentially recovered to 2019 levels. And the company’s announced its intention to pay a regular dividend starting in September.
As a result, it trades at a price-to-earnings (P/E) ratio of around 4. So it’s easy to see why analysts think the stock looks cheap – it’s trading at a low multiple while the business is gathering momentum.
Air Europa
For a lot of investors, the key point from the most recent IAG earnings report was the dividend news. And justifiably so – it shows management’s confidence in the business going forward.
There’s something else that caught my attention. The company announced it was abandoning plans to buy Air Europa – the third-largest airline in Spain. The firm said it would no longer be in the best interests of investors to pursue the acquisition.
While I’m a big fan of management being careful with shareholder capital, I view this as a blow. As I see it, this kind of deal is crucial to airlines like IAG being viable investments over the long term. Right now, the industry’s too competitive and this is an issue for all of the participants.
Competition
Most of the costs of running a flight – fuel and staffing – are the same regardless of whether a flight has 138 passengers, or 150. That means the cost of adding one more passenger is relatively minimal.
As a result, airlines are incentivised to sell their last few seats on a flight at almost any price. And with customer choices driven largely by cost, it’s hard for rivals to maintain their pricing structure.
The more airlines there are, the more chance there is of someone heavily discounting seats on a given route. IAG’s bid to buy Air Europa would have helped reduce some of the competition within Europe.
With this no longer happening, pricing should remain as competitive as ever. And this is why I’m going to stay away from the stock, despite analysts thinking it could be set for a jump.
Outlook
In my view, the airline industry badly needs consolidation – there are just too many companies attempting to fill their aircraft at any cost. If and when this happens, I might well take another look.
I wouldn’t be surprised if the analysts are right and the IAG share price is set to climb. But there’s enough to put me off the underlying business, so I won’t be buying for the foreseeable future.
This post was originally published on Motley Fool
