I think there’s a lesson in the International Consolidated Airlines (LSE: IAG) chart over the past 12 months. It’s a lesson on what not to do. At the first real signs of life early in the year, investors got back in and pushed the IAG share price upwards.
The shares reached a year-to-date gain of more than 35% in just a few months. But a second slump soon set in. And IAG shares were down nearly 10% over the past 12 months, even before Friday’s sharp dip. So what went wrong?
I think many of us fell into the same trap while watching for stock market recovery signs. We got in when the timing was starting to look right, and when sentiment was improving. But sentiment doesn’t pay the dividends. And timing is a mug’s game.
Valuation is tricky
I think we made another mistake too, and that was getting the valuation wrong. Share price down 70% or more? That doesn’t mean the company is now valued at less than 30% of its pre-crash levels. No, we must take into account the inflated debt on the balance sheet, and the dilution effect of new share issues. When those are considered, the enterprise value of IAG at times during 2021 was higher than before the crash.
Still, we’re only human, and it’s so easy to be swayed by what looks like an opportunity to get in at just the right time for a quick recovery. Hands up everyone who genuinely avoided thinking about how best to time a re-entry into fallen stocks in 2021. My hands are down.
The past is the easy part to judge. So what’s the outlook for the IAG share price by the end of 2021? And will 2022 be the year the recovery finally comes good?
IAG share price in 2022?
I’m going to stick my neck out and say I do expect the IAG share price to have a much better 2022. But I really don’t see much upside in the next month or so, certainly not now this new Covid-19 variant is causing panic.
In the third quarter, IAG reported passenger capacity at 43.4% of 2019 levels. That’s significantly up from the 21.9% level recorded in the second quarter, but it’s still a long way from a proper recovery. The British Airways owner is planning for 60% passenger capacity in the final quarter. But I think investors will remain cautious and will at least wait to see full-year figures.
If I were thinking of buying IAG shares, I would wait until the company is back into profit and sustainable cash flow. IAG did report positive operating cash flow in Q3, which is solid progress. But we still saw an operating loss of €452m in Q3. And the firm’s outlook suggests an operating loss for the full year of approximately €3bn.
Will I buy?
I have thought about buying IAG shares a few times during 2021. I’m unlikely to buy any now, having decided to keep clear of companies carrying large debts. I suspect I’ll be missing a good 2022 for the IAG share price, though. But it’s a risky opportunity that I prefer to avoid.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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