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Up 26% in a month! Here’s why I think IAG shares could still be a bargain

A pastel colored growing graph with rising rocket.
A pastel colored growing graph with rising rocket.

Investors are aware of the devastation the pandemic caused to the aviation industry. With flights grounded for nearly two years, airline earnings fell dramatically. As a result, International Airlines Group (LSE: IAG) shares fell over 73% in the three months between February 2020 and May 2020.

However, thanks to excellent third-quarter results this year and improving airline traffic, I think IAG shares could be a bargain option for my portfolio. Investor interest has surged over the last month, causing it to jump over 26%. Here I will look at its pros and cons to see if it would be wise for me to invest in the firm before 2023.

Excellent results

Looking at the Q3 report, it is easy to see the reasons behind IAG shares’ positive momentum. The company saw year-on-year revenue growth skyrocket 367% to €1.2bn compared to Q3 2021 when the company lost €452m.

In the first nine months of 2022, revenue from passenger ticket sales jumped nearly 350% to €14bn compared to the same period in 2021. This points to a healthier airline sector that is inching close to pre-pandemic traffic levels.

In fact, the board said in the report that the recovery in Q3 puts the industry ahead of 2019 levels in terms of leisure travel. IAG is on target to hit 87% of 2019’s passenger capacity in Q4 and 78% across 2022.

Can IAG shares handle big fluctuations?

While the recovery has been strong, there are also growing concerns the company will have to address in the coming months. Rising fuel prices and mounting debt are two areas most travel and transport companies are grappling with at the moment.

IAG’s total net debt currently stands at €11.05bn, down 5% from the same period in 2021. While it is positive that the company is reducing this figure, it is still sizable.

However, travel and tourism are expected to recover further as more Asian tourism markets open up. Most travel analysts expect flying hours in 2023 to be substantially better than in 2022. While this could further boost earnings and offset the debt, another big concern is the cost of fuel.

Throughout 2022, oil prices have remained high. But this trend could be reversing already, according to a recent World Bank report. After surging 60% this year, analysts expect oil barrel prices to drop at least 11% in 2023. While this is significantly higher than 2019’s average of $60, large companies will figure out ways to offset costs.

Also, this FTSE 100 firm currently has a sizable cash reserve valued at €9.3bn. I think this will help the firm navigate fuel price fluctuations better and also price out competitors in negotiations, provided travel continues to recover.

This is why I think IAG shares have the potential to continue this run if external factors remain favourable. I am bullish on the firm but the uncertainty surrounding fuel prices makes me slightly vary. The aviation firm is now on top of my watchlist and I will look to make an investment if Q4 results maintain current growth trends.

The post Up 26% in a month! Here’s why I think IAG shares could still be a bargain appeared first on The Motley Fool UK.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022