2023-05-12 06:21:59 ET
Summary
- International Consolidated Airlines Group has a lot of growth drivers this year as it lines up for another strong summer.
- Lower fuel prices should boost results.
- I continue to mark ICAGY stock a buy even after a 35% surge since I marked it a buy.
One lesson I learned after a decade of analyzing stocks is that investors and analysts often remain focused on the past or simply fail to see the potential by projecting the past misses into the future. Quite often the market is forward looking but the natural market reaction continues to be that we sell when a company misses earnings consensus.
That is something that carries some significance forward, but quite often investors fail to see the bigger picture on an earnings miss and more recently I have started to see how earnings consensus are missed for the simple reason that analysts have badly informed inputs for their models. So, a consensus is not something that should be undisputed or be regarded as an absolute bar. In this report, I will be analyzing the first quarter results for International Consolidated Airlines Group (ICAGY).
International Consolidated Airlines Group stock has gained 35% since I put a buy rating on the stock after it missed earnings estimates, but I saw the continued strength in unit revenues as well as capacity restrictions on Heathrow Airport easing . It allowed investors to make forward looking decisions instead of keeping the head buried in the sands of the past.
Results Improve, Iberia Comes Stronger Out Of Pandemic
Year-over-year, the capacity was up 46% and aided by higher load factors and strong passenger unit revenues were up 71% partially offset by a 25% decline in cargo revenues. While capacity went up 46%, costs only went up 41% despite fuel costs nearly doubling. I would say this showed extremely strong cost control for the multinational airline group. Compared to 2019, capacity is 95% recovered and revenues are exceeding pre-pandemic levels by 10%. Nevertheless, profitability is only 7% recovered, which tells you that the higher revenues are used to offset costs. That is not a weakness but an industry reality, and in some way, it might already be considered a strong signal that the naturally week first quarter was a profitable one for the airline group.
Aer Lingus is seeing revenue growth of 89% which is in excess of the group topline growth, but Aer Lingus revenues are slightly below pre-pandemic levels while capacity increased 48%. It only resulted in a 19% improvement in the losses due to higher supplier costs and ownership costs on top of the higher fuel and labor costs that could reasonably be expected.
The big addition to the profits was driven by British Airways, which saw operating results improve by £440 million on capacity expansion of 54% and passenger revenues more than doubling. Despite fuel costs doubling as well and supplier and labor costs increasing, the topline growth was strong enough for a £440 million swing in profitability, making the Heathrow based carrier profitable for the quarter. From a profitability perspective, the profits are only 6% recovered while capacity is 88% recovered and revenues are exceeding 2019 revenues by 3%.
Iberia was the mainline carrier with the best results in my view. The margins climbed to 4.5% on 23% higher capacity, 61% higher revenues and a 40% increase in costs, and contrary to the pre-pandemic quarter, Iberia is actually seeing profits. Vueling saw revenues double, and costs grow by 64% on a 60% capacity increase. So, the cost increase was very much in line with the capacity increase. The low-cost carrier generated a £64 million loss which is in line with the comparable pre-pandemic quarter. Vueling is subjected to bigger seasonality effects and its strength is focused on Q2 and Q3.
Lease Liabilities Keep Gross Debt High
Gross debt has more or less plateaued last year. From 2020 to 2021, that was driven by increases in bank loans. From 2021 to 2022, that was driven by higher lease liabilities. Airlines have to count lease liabilities as debt instruments, and that is why we see the debt more or less stable even though bank and other loans declined. Sequentially, we saw a decline in gross debt driven by lower asset finance and lease liabilities as well as bank and other loans. The net debt, however, has decreased significantly. With a strong cash pile in Q1, which is the weakest quarter for airlines, IAG is now convinced it can reduce its gross debt, which I believe is a positive.
Is ICAGY Stock Still A Buy?
For the full year, IAG expects profits to be higher than the €1.8 billion to €2.3 billion range that previously was guided for. The company didn't make it clear what drove the revision as it mentioned the risks and said that its capacity would be 97% of 2019, which is 100 bps lower than what it initially guided for. That doesn't really add up to profits exceeding the previous guidance, but my guess is that the fuel prices will be significantly lower than what the company had estimated, and I would think that there will be strong demand on routes to Asia. Q1 provides the easier comp, and the comp will likely be somewhat more challenging for airlines in the remainder of the year, but I believe that IAG will have a comp advantage as last year Heathrow was capped for quite some months during the peak travel season and so we should see that impact unwind in future reports.
I maintain my buy rating with a $5.25 per share price target based on the EV/EBITDA valuation, and that provides another 37% upside.
Conclusion: Opportunities Remain For International Consolidated Airlines Group Stock
Not remaining overly focused on past results has enabled me to make rewarding calls on ICAGY stock. Doing the same now shows that we are in a different labor cost environment, but continued improvements in capacity and, in particular, for British Airways should result in better unit costs and revenues while lower fuel prices could provide some cost relief as well. Jet fuel costs are down nearly 50% compared to a year ago, so I am expecting a strong year for International Consolidated Airlines Group with significant topline growth and lower unit fuel costs that should also help improve the margins and subsequently the stock price.
For further details see:
International Consolidated Airlines Group Remains A Stock To Buy