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Is now-profitable IAG the top airline buy among FTSE 100 stocks?

Young female couple boarding their plane at the airport to go on holiday.
Image source: Getty Images

FTSE 100 stocks are well represented within my portfolio. And International Consolidated Airlines (LSE:IAG) — more commonly referred to as IAG — is one of them.

So let’s take a closer look at this airline stock after the company reported its earnings on Friday.

Investors disappointed

Shares in IAG fell on Friday morning despite an improved financial showing in 2022. The British Airways owner swung back to profit as revenue surged on the rebound in international travel during the year.

It made an operating profit of €1.26bn in the 12 months to 31 December 2022 — an impressive turnaround from an operating loss of €2.8bn in 2021. Revenues pushed upwards to €23.1bn. The recovery is a direct result of the lifting of Covid restrictions and pent-up demand for travel.

However, investors may have been expecting more, and there was no announcement of a dividend. Instead, IAG announced a €400m deal for the remaining shares in Air Europa that it doesn’t already own.

Positive commentary

In its earnings report, IAG predicted profits for 2023 in the range of €1.8bn-€2.3bn, if conditions continue to improve. The group noted that forward bookings were strong, and struck a generally positive note.

However, it warned that the forecast was reliant on there being “no further setbacks related to Covid-19 or material impacts from geopolitical developments”. IAG also highlighted that fuel costs were up 30% since Russia’s 2022 invasion of Ukraine.

Heathrow Airport also proved to be an issue for the group in 2022. BA operated at only 70% of its 2019 schedule last year, compared with 87% at Aer Lingus and Iberia, and 98% on Vueling. The airport — which is BA’s base — suffered from staffing and resourcing issues.

Meanwhile, some analysts have suggested that the price paid for the remaining shares in Madrid-based Air Europa is eye-watering. However, the group insists it is part of a bigger plan to transform the Spanish capital “to compete with Europe’s largest hubs”: Amsterdam, Frankfurt, Istanbul, London Heathrow and Paris CDG”.

The move, IAG hopes, will unlock value, creating new routes and opportunities in Latin America.

So is IAG a buy?

There are certainly concerns about debt, which stands at 3.1 times cash profits. However, as Sophie Lund-Yates at Hargreaves Lansdown noted: “Should enough passengers continue to be funnelled on to planes, that [debt] should start to come down relatively quickly.” The group is also sitting on a cash pile of €9.6bn.

Personally, I’m not too concerned about the impact of Covid going forward. It does appear, I hope, that the virus won’t have a material impact on the industry.

There are several positive catalysts too. Demand for travel remains high, European economic growth appears more robust than originally anticipated, and commodity and fuel costs have fallen from their highs.

As such, with the share price dipping to 160p after the results, I’d like to buy more and hold for the recovery.

The post Is now-profitable IAG the top airline buy among FTSE 100 stocks? appeared first on The Motley Fool UK.

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James Fox has positions in Hargreaves Lansdown Plc and International Consolidated Airlines Group. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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 2023