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Having rallied as much as 80% from its October lows, IAG (LSE:IAG) shares had been flying high. However, the stock lost some momentum recently, falling 20% since the beginning of February. But given the bright prospects for the travel industry, could this dip be a buying opportunity for me?
A heavy transaction
I think the group’s latest earnings report would have put a smile on any investor’s face. Capacity continued to recover along with passenger numbers. Meanwhile, operating profit soared by €4.2 billion from a year earlier. Yet despite the explosive numbers, IAG shares have been in a steady decline.
This can be attributed to the weakness of the FTSE 100 in general, but I imagine investors weren’t too happy about the elephant in the room either: the Air Europa deal, which has left many concerned for a number of reasons.
IAG already has a 20% stake in the Spanish company. However, management is now opting to buy the remaining 80% and consolidate it for €400 million. Normally this would be welcome news given IAG’s huge profit potential, but investors seem to think otherwise and are dumping their shares instead.
This is most likely due to the already fragile state of the conglomerate’s balance sheet. And with the deal pending regulatory approval, IAG may have to pay a penalty if it fails. However, even if it goes through, the acquisition may further delay the company’s return to dividend payments.
![IAG Finance.](https://technicalterrence.com/wp-content/uploads/2023/03/1677723148_902_Does-IAG-Stock-Hold-the-Ticket-to-Long-Term-Wealth-Building.png)
turbulence strike
Worsening sentiment further, IAG has said it expects to face more turmoil in the short term. Staff at Heathrow airport are expected to go on strike over the busy Easter holiday, forcing IAG’s British Airways to cancel 32 daily flights.
While this shouldn’t affect the airline’s bottom line too drastically, what worries shareholders is the potential for future industrial action. And as long as inflation stays high, the disruptions are more likely to last.
Then there’s the concern around fuel costs. Jet fuel prices have come down substantially from their highs. Even so, they remain high and will continue to absorb IAG’s profits. After all, united airlines recently downgraded its first-quarter outlook due to such higher costs.
Can IAG shares soar again?
Although the recent drop in IAG’s share price may seem like travel demand is starting to cool, industry data indicates otherwise.
International seats flown continue to recover towards pre-pandemic levels and are expected to continue to grow. This sentiment is supported by Booking CEO Glenn Fogel, who said the near-term outlook for the travel industry looks rosy.
![IAG Shares - International Total Seats.](https://technicalterrence.com/wp-content/uploads/2023/03/With-IAG-shares-in-the-doldrums-is-now-the-time.png)
Therefore, I am sure that IAG shares will eventually recover and go back higher. That said, while their valuation multiples look cheap, they’re still above the industry average on most fronts, especially when compared to their budget and US counterparts.
Metrics | IAG | industrial average |
---|---|---|
Price-Sales Ratio (P/S) | 0.3 | 0.8 |
Price-Earnings Ratio (P/E) | 18.3 | 15.0 |
Forward price-to-sales ratio (FP/S) | 0.3 | 0.3 |
Forward price-earnings (FP/E) ratio | 8.7 | 7.0 |
And despite the corridors UBS, Germanand Liberium rated the stock a ‘Buy’ with an average price target of £1.68, there are other cheaper airline stocks with better financials and higher price targets that I’d rather invest in. Therefore, I will not buy IAG shares today.
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