Shares in International Consolidated Airlines Group (LSE:IAG) have climbed 113% over the last 12 months. That’s enough to turn £10,000 into something with a market value of £21,301 today.
Despite this, the average analyst price target‘s 17% above the current level. So should this be a stock investors have on their radars as a potential buying opportunity?
Returns
A 113% gain is outstanding by itself, but it’s even more impressive in the context of the wider stock market. Nvidia – at the forefront of artificial intelligence (AI) – is up 71% in the same time.
I’m not saying the two companies are equal. They aren’t, it’s clear which one has better prospects, and a look at what the stocks have done in the last five years reflects this.
Equally though, they aren’t priced like comparable businesses. While Nvidia shares trade at a price-to-earnings (P/E) ratio of 54, IAG stock trades at around 8 times earnings.
A low earnings multiple can be a sign of investors being pessimistic about the stock. But analyst forecasts are strong, with earnings set to reach pre-pandemic levels in 2027.
Earnings
Analysts are expecting IAG’s earnings per share to climb steadily and reach 62p by 2027. With the stock trading at £3.26, that could make the current share price extremely good value.
Investors however, should be wary. Whether it’s pandemics, ash clouds, or economic downturns, the airline industry’s prone to downturns – and the effects can be significant. This is because the likes of IAG have a lot of fixed costs. These are expenses that don’t go away even when demand subsides for some reason.
As a result, airline earnings generally don’t just go lower in a downturn – they go negative. So investors should be wary of thinking a P/E ratio of 8 provides any sort of margin of safety.
Flag-waving
IAG’s a flagship carrier for both the UK (British Airways) and Spain (Iberia). That differentiates it from the likes of easyJet and Wizz. There are some positives to this. Theoretically, it can mean the company is a candidate for support when – as is so frequently the case – things get difficult for the industry.
That protection however, can come at a cost. In general, a flag carrier can find it has to balance its interests with those of a national government.
From an investment perspective, I find this unattractive. I think generating returns is hard enough for airlines without the potential for additional complexity in their decision-making.
Long-term investing
Right now, the outlook for IAG shares is very good. Since the end of the pandemic, the company has been growing its earnings impressively and this looks set to continue.
But in the airline industry, things look good until they don’t. And when things change, the effects are often substantial on earnings and balance sheets.
As a flag carrier, IAG might have better protection than some other airlines. But over the long term, this makes the company too complicated for me to consider buying.
This post was originally published on Motley Fool
