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Those who invested in IAG (LSE:IAG) stocks in October would have seen their wealth grow by 65%. As the travel industry continues to strengthen, the company’s share price is expected to continue to grow. With that in mind, IAG shares could be an excellent long-term wealth builder.
a turbulent reaction
IAG shares were already up 25% this year, so investors had high expectations for full-year earnings. While the company’s bottom line matched analyst estimates, its bottom line disappointed slightly. Consequently, investors reacted negatively and IAG’s share price fell 6%.
| Metrics | Consensus | 2022 | 2019 | Growth |
|---|---|---|---|---|
| Revenue | €24.38 billion | €23.07 billion | €25.51 billion | -10% |
| operating income | €1.2 billion | €1.26 billion | €3.29 billion | -62% |
| Basic earnings per share (EPS) | €0.09 | €0.09 | €0.78 | -88% |
However, the fall in shares should not take away from what was otherwise a great year for the group, as it continues to recover towards pre-pandemic levels. Although the conglomerate failed to beat consensus on its revenue and profit, IAG still shared very encouraging trip numbers.
Capacity, revenue passenger-kilometres, ridership, and load factors all all all saw healthy increases from last year. Notably, IAG managed to meet its guidance for fourth quarter capacity, which came in at 87% of 2019 levels.
| Metrics | 2022 | 2019 | Growth |
|---|---|---|---|
| Capacity/Available seat kilometers (ASK) | 263.59bn | 337.75bn | -22% |
| Revenue Passenger-Kilometer (RPK) | 215.750 million | 285.750 million | -24% |
| passengers transported | 94.73m | 118.25m | -twenty% |
| Charge factor | 81.8% | 84.6% | -2.8% |
Long way to cruising altitude
Having said that, there is still more good news to come. Despite the strong rally in IAG’s share price in recent months, its upside potential remains tremendous and passenger numbers to all regions still have plenty of room to grow.
More importantly, business (B2B) travel, which is known for its higher ticket yields, is still making a steady recovery. This growth should continue to improve IAG’s results given its higher margins.
Therefore, the general director Luis Gallego updated the FTSE 100 the unconditional outlook for the coming year. It now expects first-quarter capacity to be 96% of 2019 levels, and full-year capacity to be 98%. In addition, the airline expects operating profit before exceptional items to be in the range of 1.8 to 2.3 billion euros.
Are IAG shares worth it?
On that basis, is IAG stock worth buying? Well, his balance sheet is still in tatters. The fact that the council expects to retain a net debt of 10.4 billion euros in 2023 makes it even more worrying. After all, the owner of British Airways had already shelled out €291 million to cover the interest on its variable-rate debt last year. And since interest rates are expected to stay high longer, your large amount of debt won’t help your bottom line.
However, stock valuation multiples cannot be ignored. Its current and future multiples are trading at a much cheaper valuation than the industry average. It is therefore not surprising that broker Liberium reiterates its ‘buy’ rating on IAG shares with a £2.20 price target. This presents a 40% advantage over current levels.
| Metrics | IAG | easyJet | industrial average |
|---|---|---|---|
| Price-Sales Ratio (P/S) | 0.4 | 0.6 | 0.8 |
| Price-Earnings Ratio (P/E) | 20.1 | N/A | 15.9 |
| Forward price-to-sales ratio (FP/S) | 0.3 | 0.5 | 0.7 |
| Forward price-earnings (FP/E) ratio | 10.7 | 19.4 | 27.8 |
In addition, the travel giant seeks to complete the acquisition of Air Europa by mid-2024. This should generate additional fleet capacity for the consortium to capture the growing demand for international travel, while also presenting lucrative growth opportunities in Latin America, the Caribbean and Asia.
I can safely say that buying IAG shares could give me the opportunity to grow my wealth, and its current valuation makes the investment even more attractive. However, I can’t get over his pile of unhealthy debt, so I’d rather stay away. I prefer to invest in other travel-related stocks, such as easyJetwhich has as much upside potential as IAG, with healthier financials.
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