BABWF - IAG Executes Well On Growth Stock Has Huge Potential Upside

2023-10-16 12:54:10 ET

Summary

• Airline stocks are under pressure due to concerns about airfares, labor costs, and oil prices.
• International Consolidated Airlines Group stock outperformed the market, gaining 22.3%.
• IAG's growth drivers are validated, with capacity growth, reduced unit costs, and manageable debt profile.

Airline stocks have been under pressure lately due to concerns about sustained strengths in airfares coupled with higher labor costs as well as mounting oil prices. The situation in Israel triggered several airlines to cancel flights to Israel, but the bigger issue for airline operations is that oil prices headed higher on fears of an escalation in the Middle East. In this report, I will be discussing the prospects of International Consolidated Airlines Group ( ICAGY ) (abbreviated to "IAG").

International Consolidated Airlines Group Stock Outperforms The Market

Since I marked shares of International Consolidated Airlines Group a buy, the stock has performed as expected gaining 22.3% compared to a market gain of 5.3%. Airlines are generally higher risk to invest in, so a strong market outperformance is what I am looking for.

The Growth Drivers For IAG Are Largely Validated

The reason I saw significant potential for the stock is because capacity constraints at the airports of London Gatwick and London Heathrow were putting significant pressure on the operations of British Airways, but those pressures were unlikely to be of any permanent form while the international or long-haul markets still had a lot of room ahead allowing for significant reductions in unit costs as well as continued strength in airfares.

The slide above shows that the airline group was able to grow its capacity by 30% year-over-year, and unlike many other airlines, it was even able to reduce its unit costs and that is despite a 5.7% increase in unit fuel costs. Total unit costs were down around 4% and non-fuel unit costs were even down 7.3%.

Furthermore, I pointed out that the company had a very manageable maturity profile and sufficient liquidity. That maturity profile remains manageable with almost no debt remaining to be repaid in 2023 after the €500 million bond repayment and until 2025 there is €1.1 billion maturing. The biggest chunk of debt maturities will be in 2026 when almost €2.8 billion is due. Meanwhile, cash and cash equivalents and other interest-bearing deposits have grown to €12.0 billion from €9.2 billion and net debt has reduced to €7.6 billion most of which seems to be packed in lease debt with only €6.5 billion in bank loans which the company can easily cover with its current cash position.

International Consolidated Airlines Group Stock Upside Remains

For International Consolidated Airlines Group, I am maintaining my buy rating. At the company median, the upside is around 50% with a $2.50 price target while expansion of the EV/EBITDA median towards the industry median even provides an upside to $4.60 or 173% upside, but for now, I am putting the price target on $2.50.

Conclusion: IAG Stock Remains A Buy

IAG remains a buy in my book. We see the company executing well on its deleveraging path and its operational performance has also significantly improved year-over-year. The company has been able to deleverage, add to capacity, and bring unit costs down. The operational risk continues to exist in the form of airfare weakening and higher fuel prices, but I believe international growth should provide continued strength.

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