The International consolidated airlines (LSE:IAG) The share price is 63% below its pre-pandemic level. However, analysts seem to believe the stock is well below where it should be.
According to TradingView, the stock is currently 38% below analysts’ average price target, so is there an opportunity for investors as the company slowly begins to recover from the impact of Covid-19?
recreation
It has taken a few years, but IAG is roughly back to where it was before Covid-19, with both operating margins and total debt recovering to pre-pandemic levels.
A key reason for the good balance sheet is that the company raised money by issuing shares. As a result, the number of shares issued increased significantly – and has not decreased since then.
Nevertheless, earnings per share have essentially recovered to 2019 levels. And the company has announced that it will begin paying a regular dividend 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 is cheap: it’s trading at a low multiple while the business is gaining momentum.
Air Europa
For many investors, the dividend announcement was the most important point in IAG’s latest earnings report. And rightly so – it shows how confident management is in the company’s future.
And something else caught my attention. The company announced that it was abandoning its plans to buy Air Europa – Spain’s third largest airline. The company stated that it was no longer in the interest of investors to continue with the acquisition.
While I am a big supporter of management being careful with shareholders’ capital, I feel this is a blow. In my view, a deal like this is crucial to making airlines like IAG viable investments in the long term. At the moment, the industry is too competitive and this is a problem for everyone involved.
Competition
Most of the costs of operating a flight – fuel and personnel – remain the same whether the flight has 138 or 150 passengers. This means that the cost of an additional passenger is relatively low.
As a result, airlines have an incentive to sell the last seats at almost any price. And since customers’ purchasing decisions are largely driven by cost, it is difficult for competitors to maintain their pricing structure.
The more airlines there are, the more likely it is that an airline will heavily discount seats on a particular route. IAG’s offer to acquire Air Europa would have helped to reduce competition within Europe somewhat.
Since that is no longer the case, prices should remain as competitive as ever. And that is why I will stay away from the stock, even though analysts say it could be on the verge of a price jump.
outlook
In my opinion, the airline industry is in dire need of consolidation – there are just too many companies trying to fill their planes at any cost. When and if that happens, I may take another look.
I wouldn’t be surprised if the analysts are right and the IAG share price goes up. But there’s enough to put me off the underlying business, so I won’t be buying any time soon.
The post “Analysts think IAG shares could rise 38%. What should investors do?” appeared first on The Motley Fool UK.
Further reading
Stephen Wright does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such 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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