International Consolidated Airlines Group S.A. (FTSE: IAG) Summary – Aug 1st, 2020

(Khalid Nazir and Ananya Kumar)

Introduction 

International Consolidated Airlines Group, S.A. (or IAG) is an airline company that holds the interests in airline and ancillary operations. Its segments include British Airways, Iberia, Vueling, Aer Lingus and other Group companies. It combines the airlines in the United Kingdom, Spain and Ireland. It has approximately 573 aircrafts to over 268 destinations. The Company operates various aircraft fleet services, including Airbus A318, Airbus A319, Airbus A340-600, Boeing 787-800, Embraer E190 and Boeing 777-200, among others. The Company, through its subsidiaries, is engaged in providing airline marketing, airline operations, insurance, aircraft maintenance, storage and custody services, air freight operations and cargo transport services. The Company offers its services in cities, including London, Madrid, Barcelona, Rome and Dublin. The Company’s brands include British Airways, Iberia, LEVEL, Vueling, Aer Lingus, IAG Cargo and Avios. 

IAG 2016 2017 2018 2019 CURRENT 
PRICE/SALES (TTM) 0.49 0.65 0.59 0.56 0.17 
PRICE/EARNINGS 6.15 7.66 4.97 6.75 2.60 
PRICE/BOOK 2.43 3.12 1.77 2.19 0.61 
DEBT/EQUITY 21.36 13.76 14.52 15.58 19.93 
PEG RATIO 16.26 13.06 20.12 14.81 -2.00 
EARNINGS PER SHARE 0.23 0.27 0.28 0.39 -0.28 
ENTERPRISE VALUE (BIL) 13.12 15.09 12.88 19.35 11.70 
ENTERPRISE VALUE/EBITDA 5.71 5.50 3.40 6.04 13.27 

Analysis 

IAG is trading at £170.57 per share as of the close on the 31st of July 2020, significantly lower than the share price before the market crash in March, which was £639.60 per share on the 14th of February 2020. 

The value of IAG’s sales, as shown by the price/sales ratio, was fairly steady between 2016 to 2019, with the price ranging from 0.49 at its lowest to 0.65 at its highest. However, it has recently declined, falling to 0.17 in its current value, signaling a decline in the value of sales. The relative value of shares as indicated by the price/earnings has also been fairly stable in the past four years, averaging at 5.626. However, it has also seen a recent decline, falling to 2.60 in its current value, signaling slower growth in earnings. IAG’s enterprise value (EBITDA) has been on the rise, increasing by approximately 132% from 2016, currently standing at 13.27. This indicates relatively strong growth, a positive sign. Again this was before the pandemic had hit, and the outlook is now completely different with air traffic dropping significantly and record losses being made of £3.8bn, it is safe to assume that it will around 3 to 4 years for the air traffic to recover, which will lead to the share price and the relevant ratios to recover too. 

Average earnings per share were on the rise between 2016 to 2019, rising from 0.23 to 0.388. Its current value, however, has dipped to -0.28, potentially reflecting the losses faced by IAG as COVID-19 restrictions limit air travel. A similar trend is observed in the PEG ratio, where values were relatively healthy in the past four years (ranging from 13.06 to 20.12) but have dipped to -2.00, indicating negative growth. This trend is likely to continue in the short-term, but if restrictions are eventually eased things will improve. 

The Debt/Equity (D/E) ratio is a key indicator of IAG’s financial health, through assessing the degree that company growth is built upon debt. The most recent D/E value of 47% is considered high by the average industry values pre COVID-19 which goes to suggest IAG is managing an unsustainable amount of company debt, making its future security uncertain. Furthermore, IAG short-term assets (€11.3B) fails to cover its long-term liabilities (€16.1B) and short-term liabilities (€12.7B) which both provide additional evidence on paper that long term investment is risky given the situation. However, it is important to note IAG, like many of the airline industry has been impacted significantly by the COVID-19 pandemic and has only seen its stocks drop significantly due to the restrictions on air travel and the costs that are coming with that from the lack of air travel. 

Conclusion 

Recommendation: Buy – Long Term 

The business does face an uncertain near future, and the situation could worsen before it starts to get better again. But IAG should be able to get backing for their financial needs and the competitive advantages it has over other firms will position it better than other airlines for recovery over the next 5 to 10 years. 

Although IAG has not been performing well as of late due to the COVID-19 Pandemic, looking in the long run, IAG does look attractive to invest in. The whole airline industry has been hit hard by the pandemic with air travel dropping significantly, as much as 90% over skies of Britain compared to last year. At the end of March, air traffic volumes in Germany were also down by 80%, as well as 82% in France, 85% in Spain, and 88% in Italy.  

As a result, IAG has seen its stock price tank to a low of 168.20 on 13th May and is trading at 170.57 as of the 31st of July. These figures are the lowest it has ever been since November 2012 and has come from IAG not making enough revenue, having to negotiate pay cuts with their pilot and having to lay off many workers in the other parts of the firm such as the cabin crew. This is on top of the massive record losses that IAG has posted in the first half of 2020, accumulating to a loss of £3.8bn. The group, which said passenger numbers fell by 98% in the second quarter, has already said it is to cut 12,000 jobs to reduce costs. The impact of travel and border restrictions in most countries meant it was only able to operate a “skeleton passenger schedule” in the second quarter, only 5% of the capacity compared with the same quarter last year and is predicted to recover fully by 2023. 

Another factor why the share price has fallen is due to the uncertain outlook of IAG. For example, more lockdowns could force the firm to ground its fleet once again which will result in more incurring costs. A strike would have the same impact, and if the group is forced to cancel more flights, its balance sheet issues may become even more pressing and may not be able to withstand the impact. 

However, IAG owns some of the largest airlines in the world. It also controls critical flight routes and landing slots in the UK such as that in Heathrow Terminal 5 and Gatwick Airport. These give the business a strong competitive advantage and thus may allow it to make a strong recovery from its recent setbacks over the long term. 

Industry Jargon 

  • Price/Earnings (P/E) ratio – P/E is defined as the given price of a share divided by the given earnings per share (EPS) at the same time. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical records or to compare aggregate markets against one another or over time. 
  • Earnings per Share (EPS) – Earnings per share is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The higher a company’s EPS, the more profitable it is considered. 
  • EBITDA – EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. 
  • Debt to Equity (D/E) Ratio – The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It is used to evaluate a company’s financial leverage (i.e. how much of the firm is growing by using its own equity rather than borrowed funds) 
  • Trailing Twelve months (TTM) – is the term for the data from the past 12 consecutive months used for reporting financial figures. A company’s trailing 12 months represent its financial performance for a 12-month period; it does not typically represent a fiscal-year ending period. 
  • PEG ratio - The price/earnings to growth ratio (PEG ratio) is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio. 

Bibliography 


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