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International Group of Consolidated Airlines (LSE: IAG), the parent company of British Airways, Iberia and other airlines, has been through a turbulent journey. The stock, once a darling of the aviation industry, has plunged a staggering 47% over the past five years. With many companies in the travel sector experiencing incredible recoveries since the pandemic, is a rebound in the IAG share price long overdue?
What happened?
The decline can largely be attributed to the devastating impact of the Covid-19 pandemic on the global aviation industry. As travel restrictions were imposed and consumer demand plummeted, airlines found themselves in a precarious position, bleeding cash and facing unprecedented operational challenges.
The pandemic was clearly the catalyst. However, the company's struggles were compounded by broader industry headwinds, including rising fuel costs, labor disputes and intensifying competition from low-cost airlines.
The basics
Valuation metrics suggest that the company's shares may be undervalued. A discounted cash flow (DCF) calculation suggests the stock is trading about 13% below the estimated fair value. It may not be as exciting as other opportunities, but there may be upside for investors hoping for a long-overdue recovery.
The company's price-to-earnings (P/E) ratio of 3.6 times is relatively low. This indicates that investors are paying a decent price for every pound of profits. For many, this assessment could be perceived as compelling, especially for a major player in the European aviation market.
Whats Next?
From the looks of it, last year's financial performance has provided some glimmers of hope. The company's profits grew by an impressive 142.1% year-on-year. This reflects the gradual revival of travel demand and efforts to streamline operations and reduce costs.
However, analysts are not convinced. Earnings are expected to decline by an average of 1% annually over the next three years. This tepid growth forecast could reflect concerns about the company's ability to maintain profitability.
However, IAG's revenue is expected to grow a respectable 4% annually. This suggests revenue remains resilient and poised for expansion as the global travel industry continues to recover.
Risks
For me, a key area of concern here is the high level of debt. With a debt-to-equity ratio of 491%, the company carries a significant debt load. This could seriously hamper their ability to invest in growth initiatives and weather economic turmoil.
It is important to note that debt is not uncommon in the airline industry, where substantial investments are needed. However, with the stock price still hit by the pandemic, investors are clearly worried.
While pent-up travel demand has fueled a strong recovery in recent months, lingering concerns about economic headwinds, competition, geopolitical tensions and sustainability challenges could pose risks to the industry.
In general
While the decline in IAG's share price over the past five years has been significant, the current valuation and financial performance suggest a rebound could still be possible. With shares trading at a discount to their estimated fair value and earnings growth showing signs of recovery, patient investors may be rewarded. However, the modest forecasts and broader uncertainties facing the aviation sector mean I will stay away for now.
