As profits return, is the IAG share price too low?

It’s been a challenging few years for airline owners, such as parent British Airways IAG (LSE: IAG). But the company announced this morning that it has returned to profit at a full-year level. Is it possible to see the IAG share price – and should I add the company to my portfolio in anticipation?

Strong return to form

The annual results were no surprise as the company’s performance improved in recent quarters. However, they still provide a strong data point that IAG’s business is doing well.

Revenue of €23.1bn was at 10% of the pre-pandemic level of 2019. Profit after tax came in at €431m. This is a clear improvement from last year’s €2.9bn loss.

After almost €10bn of losses in just two years, the return to the black is a return to normality. It is also a positive thing on a practical level. Profits can help companies pay off some of their debt piles. Indeed, last year net debt fell by €1.2bn. But there is still €10.3bn.

Constant momentum

I think there will be more good news in the next year or two. After all, profits have not returned to 2019 levels, but I can.

Also, although it’s good to see the company reporting profits, they’re 88% lower than in 2018. So I see a pretty big opportunity for the company to perform strongly even if it’s just going back to what it’s been doing before, let alone improving. .

Demand for air travel is skyrocketing worldwide. There is a risk that it could suddenly change, due to unexpected events, or consumers tightening their belts in a recession. But if demand remains high, it should be good news for IAG’s share price.

It may mean not only higher profits, but also that the company gains more pricing power. That could help boost profits closer to historical levels.

The value of IAG shares

While the results were strong, IAG’s share price was only 6% higher than a year ago. Why aren’t more investors rushing to pile into the company as it recovers?

One reason could be the price. The market capitalization is around 8 billion. For a company with such an inconsistent history of profits and earnings last year of €431m, it doesn’t seem cheap to me. The price-to-earnings ratio (P/E) is about 20. If earnings increase next year, as I expect, the forward-looking P/E ratio looks more attractive.

But then there is still the debt. It needs to be serviced and eventually repaid. The company did well to reduce its net debt last year. Even at the 2022 debt reduction rate, it will take eight years for IAG to move to a net cash position. That’s a long time in the world of aviation, where big costs can happen unexpectedly in a short period of time.

Given these risks, I don’t think IAG’s share price is too low. It seems true to me for the company’s current performance and prospects. I won’t buy it.