Do IAG shares hold the ticket to building long-term wealth?

That invests in IAG (LSE:IAG) shares in October will see their wealth rise by 65%. As the travel sector continues to strengthen, the company’s share price will continue to grow. With that in mind, IAG shares can be a great choice for long-term wealth building.

Turbulent reaction

IAG shares are up 25% this year, so investors have high expectations for a year’s earnings. While the company’s bottom line was in line with analysts’ estimates, the top line was a bit of a disappointment. Consequently, investors reacted negatively, sending IAG’s share price down 6%.

Metric	Consensus	2022	2019	Growth
results	€24.38 billion	€23.07 billion	€25.51 billion	-10%
Operating income	€1.20 billion	€1.26 billion	€3.29 billion	-62%
Basic earnings per share (EPS)	€0.09	€0.09	€0.78	-88%

However, the decline in the stock should not be the highlight of a good year for the group as it continues to recover to pre-pandemic levels. Although the conglomerate failed to beat consensus for top and bottom lines, IAG still showed encouraging travel numbers.

Capacity, revenue passenger kilometers, number of passengers, and load factor are all up healthy from last year. In particular, IAG was able to complete its guidance for Q4 capacity, which came in at 87% of 2019 levels.

Metric	2022	2019	Growth
Capacity / Available Seat Kilometers (ASK)	263.59 billion	337.75 billion	-22%
Revenue passenger kilometers (RPK)	215.75 billion	285.75 billion	-24%
Passengers are carried	94.73 m	118.25m	-20%
Load factor	81.8%	84.6%	-2.8%

Long way to high cruise

Having said that, there is still more good news to come. Despite the rebound in IAG’s share price in recent months, the upside potential remains very good with passenger numbers for all regions still having plenty of room for growth.

More importantly, business travel (B2B), known for its higher ticket yield, is still recovering steadily. This growth should continue to add to IAG’s bottom line due to higher margins.

Therefore, CEO Luis Gallego updated on FTSE 100 stalwart prospect for next year. They now expect Q1 capacity to be at 96% of 2019 levels, and for full year capacity to come in at 98%. What’s more, the airline forecasts operating profit before exceptional items to be in the range of €1.8bn to €2.3bn.

What is IAG’s share price?

On the basis, are IAG shares worth buying then? Well, the balance sheet remains in tatters. The fact that the council expects to have a net debt of €10.4bn in 2023 makes everyone worry. After all, the owner of British Airways had forked out €291m to cover interest on floating-rate debt last year. And with interest rates anticipated to remain high for much longer, a large debt pile won’t help.

However, the stock’s valuation multiple cannot be ignored. Current and forward multiples are trading at lower valuations than the industry average. Therefore, it is no surprise to see broker Liberium stating a ‘buy’ rating on IAG shares with a price target of £2.20. This gives a rise of 40% from the current level.

Metric	IAG	easyJet	Industry average
Price-to-sales ratio (P/S).	0.4	0.6	0.8
Price-to-Earnings (P/E) ratio.	20.1	N/A	15.9
Price-to-sales ratio (FP/S).	0.3	0.5	0.7
Price-to-earnings ratio (FP/E).	10.7	19.4	27.8

In addition, the travel giant wants to complete the acquisition of Air Europa in mid-2024. This should bring additional fleet capacity to the consortium to capture the growing demand for international travel, while providing profitable growth opportunities in Latin America, the Caribbean, and Asia.

You could say that buying IAG shares could give you an opportunity to increase your wealth, and the current price makes the investment even more attractive. However, I couldn’t deal with an unhealthy pile of debt, so I preferred to stay. I prefer to invest in other travel related stocks such as easyJetwhich has upside potential like IAG, with healthier financials.