What’s going on with the IAG share price lately?
It has been a good few years for shareholders in British Airwaysâ parent company International Consolidated Airlines Group (LSE: IAG). The share price for IAG (as it’s known) is up 27% so far this year and has more than doubled over the past five years.
However, a look at the price chart shows that it seems to have gone into something of a holding pattern â with the current price the same as it was back in July.
Is the share just taking a breather before potentially gaining more altitude, offering me a buying opportunity for my portfolio? Or could the recent lack of upward momentum signal waning investor enthusiasm?
Apparently cheap valuation
Despite its strong performance over the past five years, the IAG share price-to-earnings ratio is still only 7. That potentially looks very cheap.
The company owns multiple large, well-known airlines. It has dominant positions at airports including Heathrow. It has also improved its financial performance markedly in recent years, riding the wave of leisure travel demand that followed the pandemic.
In the first half of this year, for example, IAG recorded year-on-year revenue growth of 8%. Basic earnings per share soared 48%, while net debt fell by over â¬2bn to â¬5.5bn.
The company said it was continuing to see robust demand and is âconfident in delivering good earnings growth, margin progression and strong returns to shareholders this yearâ.
If things continue well, then the current share price does look pretty cheap to me and I think there could be room for the price to move further upwards.
Possible turbulence ahead?
But why has it not been doing that over the past couple of months?
I have learned a few things by owning airline shares over the years, including this one.
Passenger demand can fall suddenly. The economics of the business are fragile, as there are high fixed costs like plane leasing charges and fuel bills for routes that basically cannot be cut even when demand falls (as some airports operate a âuse it or lose itâ policy for landing and take-off rights).
IAG pointed to weakening demand in economy cabins for leisure travellers originating from the US. I think that set alarm bells ringing for some investors, perhaps explaining the share’s performance since July. With many key economies looking fairly unpromising and discretionary consumer spending tightening, I would not be surprised if airlines more generally start to report softer demand.
With its changes to British Airwaysâ loyalty programme, I reckon IAG may have hurt rather than helped build passenger loyalty. And while it has reintroduced some elements of service after removing them before, I believe IAGâs relentless cost-cutting of recent years has likely permanently damaged many passengersâ perception of its brands.
When times are good enough, companies can treat their customers largely how they choose and still do well. But when demand weakens, the long-term impact of relentless cost-cutting often rears its head.
I see a real risk that leisure demand for flights will fall markedly over the next several years. Meanwhile, business demand has never really come back fully since the pandemic.
On that basis, while the share price does look quite cheap based on current earnings, I am wary of the longer-term outlook and will not be investing.
The post Whatâs going on with the IAG share price lately? appeared first on The Motley Fool UK.
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More reading
- Should I buy IAG for the traditional Q4 share price boom?
- Where will the IAG share price go next? Here’s what the experts say
- Prediction: in 12 months the high-flying IAG share price could turn £10,000 intoâ¦
- Around a 5-year high, IAGâs share price still looks 66% under its fair value to me!
- This FTSE 100 stock is at multi-year highs but has a P/E ratio of just 8!
C Ruane has no position in any of the shares mentioned. 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.
