British Airways owner, IAG (LSE:IAG) is set to share its full-year results later this week. Given the positive reports from its local and international peers, it’s no surprise to see the stock already up 30% this year. Even so, I may still start a position before earnings are released.
Pre-departure numbers
Since IAG last reported its Q3 figures, its shares have rallied by approximately 40%. As such, there are high expectations for the company’s Q4 figures, with capacity forecast to be at 87% of 2019 levels. In fact, analysts are even projecting higher numbers than the original outlook provided by the board in October.
Metrics
FY22 (Consensus)
FY19
Projected growth
Revenue
€24.38bn
€25.51bn
-4%
Operating income
€1.20bn
€3.29bn
-64%
Basic earnings per share (EPS)
€0.09
€0.78
-88%
Data source: IAG, Seeking Alpha
These higher expectations can be attributed to a number of factors. These range from lower air fares to cheaper fuel prices. All of this should have encouraged demand while improving the firm’s bottom line.
Data source: ONS, Index Mundi
That said, the IAG share price will be heavily dependent on the outlook provided by management for Q1 and the year ahead. Currently, CEO Luis Gallego is anticipating the group’s capacity to hit 95% of 2019 levels in Q1. But Deustche‘s recent upgrade on easyJet shares, citing a better economic outlook, could result in an upward revision for IAG’s Q1 capacity.
Getting back to business
Capacity aside, I’ll be keeping a close eye on profit margins too. This will be a crucial driver in bringing the bottom-line figure back up. As of Q3, the conglomerate still has a negative profit margin of -0.6%, despite seeing a significant improvement from -89% in 2020.
This is because the airline’s long-haul routes, which yield higher profits, are still not at full capacity. And although sales for premium products such as first class and business class are back at 2019 levels, capacity is still lagging substantially. Additionally, business travel (B2B) volumes are only at 75%. This is an important area for margin expansion because B2B is more inelastic in demand and yields higher rates due to the bigger purchases of premium products. Therefore, B2B travel could be a key catalyst to lift IAG shares higher.
I wouldn’t be surprised to see B2B hit 85%-90% of pre-pandemic levels in Q4. After all, Trip Advisor, Expedia, and Marriott all reported a resurgence in business clients in their year-end results. More encouragingly, they said they see strong business demand going into the summer.
Refuelling the balance sheet
Will I start a position with IAG shares today then? Well, the FTSE 100 stalwart has an improving set of financials. While net debt is expected to edge higher in Q4, this is due to higher spending used to acquire better and more fuel-efficient aircraft. In that context, I believe IAG’s balance sheet should benefit over the long term along with its rapidly growing free cash flow.
Data source: IAG
Nevertheless, it’s worth noting that the stock’s upside remains limited for now. Goldman Sachs, UBS, and Deutsche have an average price target of £1.70, not far above current levels.
Its current and future valuation multiples may indicate a bargain. However, easyJet trades on similar multiples, and has a higher upside from its current share price. Thus, for all the potential benefits of investing in IAG shares, I won’t be buying today.
Metrics
IAG
easyJet
Industry Average
Price-to-sales (P/S) ratio
0.5
0.7
0.8
Forward price-to-sales (FP/S) ratio
0.4
0.5
0.7
Forward price-to-earnings (FP/E) ratio
13.2
20.6
30.4
Upside to average price target
1%
8%
N/A
Data source: Simply Wall St, Marketbeat
The post IAG shares: a good buy before earnings? appeared first on The Motley Fool UK.
Should you buy IAG shares today?
Before you decide, please take a moment to review this first.
(Even if you weren’t born before 1972.)
Because The Motley Fool’s top UK analysts have revealed: ‘5 Stocks for Trying to Build Wealth After 50’. And you can grab this report, absolutely free.
In our opinion, it’s never too late to build wealth with shares. Indeed, with markets down this may be an ideal time to start.
And while past performance is not an indicator of future results, history has shown that after shares fall by 20%, there’s a 90% chance they’ll be higher within 5 years.
When they do, the average return has been 61%.*
So while there are no guarantees, our analyst team have a habit record of finding such opportunities. In 10 minutes, this free report brings you up to speed .
See the 5 stocks
* Source: Robert Shiller, Economist – Yale University. Figures based on historic US market data from 1871 – Present, with additional calculations by The Motley Fool.
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#fff’);
})()
More reading
2 reasons why IAG stock could hit 200p this year
I have £1,890 to invest! Should I buy these FTSE 100 value shares?
Will the booming IAG share price break the £2 barrier?
The IAG share price has soared 30% this month! Am I too late to buy?
Is IAG the FTSE 100’s best cheap dividend stock?
John Choong has positions in easyJet Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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.