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Since bottoming out at 94 pence in October, stocks in International Consolidated Airlines Group (LSE:IAG) are up more than 50%. With the travel sector showing no signs of cooling off, I think stocks could continue their bullish trajectory into 2023.
International tailwinds
The main reason behind my optimism for IAG shares is the strong performance of the industry. Travel demand remains strong as consumers continue to enjoy vacations after years of Covid restrictions. As such, it is not surprising that CEO Luis Gallego guided passenger capacity to reach 95% of 2019 levels in the first quarter of this year.
This perspective should not be taken lightly either. ryanairThe most recent update of continues to show such strength that airline ticket sales show no signs of cooling off. Consequently, the budget airline upgraded its earnings outlook for the year.
Additionally, industry data estimates show that advance bookings are pulling back sharply towards 2019 levels, especially for international travel. Also, as China continues to remove most of its covid restrictions, this could serve to boost IAG shares.
Margin Update
International flights are considered more cost effective in most cases. In addition to operating with greater economies of scale, the group will also benefit from luxury travel, where first-class and business-class products are sold.
Some would say that the looming UK recession could put a dent in this recovery, but I disagree. Luxury goods and services tend to be more immune to economic downturns due to their wealthier customer base.
Additionally, oil prices continue to plummet with more refineries coming back online. This should allow jet fuel prices to come down as well. Therefore, all of these factors should serve as additional tailwinds to increase IAG’s revenue per passenger-kilometre (RPK) and expand its margins beyond the easyJet Y jet2.
Increased cash flow
Most importantly, however, investors expect all of this to translate into strong and positive free cash flow. In the most recent quarter, the conglomerate returned to profitability. However, investors will need to see an improvement in their balance sheet before driving IAG’s share price higher.
As long as debt levels continue to decline and free cash flow continues to improve, the FTSE 100 Stalwart could offer returns to shareholders in the form of dividends as early as 2024. This would invariably attract the attention of many dividend investors. This is because IAG shares could serve to be a lucrative passive income stock.
Having said this, German Y JP Morgan they still have the shares on hold with a £1.40 average price target. This does not provide much of an advantage over its current share price. In fact, one could make a case for selling at these levels! However, it is worth noting that these ratings were given in October, when IAG’s share price was at its lowest point in a year.
Given the dramatic improvement and recovery in their financial condition, coupled with a strong travel sector, I expect these investment banks to be fishing for target price improvements in due course. Additionally, a price-to-sales (P/S) ratio of 0.5 indicates a bargain at these levels. Therefore, I will be looking to buy IAG shares once my preferred broker launches UK shares on their platform.
