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Final 12 months was a superb one for shareholders in Worldwide Consolidated Airways Group (LSE: IAG). In actual fact, IAG shares carried out higher than every other within the FTSE 100.
But regardless of that excellent efficiency, the present share price-to-earnings (P/E) ratio is seven. That sounds pretty low-cost at first look.
The overall precept is that the decrease a P/E ratio, the cheaper the share appears, though in observe that additionally will depend on whether or not earnings are more likely to keep on the identical stage and in addition how much debt the company is carrying.
So, with that kind of P/E ratio and powerful business efficiency, might IAG shares transfer increased in 2025 – and ought I to think about including the airline proprietor to my portfolio?
2025 might be an amazing 12 months commercially
Seeking to the 12 months forward, I feel issues might go nicely for IAG. Civil aviation demand is excessive and it might keep that means into the summer time. On the third-quarter level final 12 months, IAG mentioned it anticipated its robust efficiency to proceed for the remainder of 2024.
It didn’t get into element in regards to the 2025 outlook at that time, however did say that, “Long term we see constructive, sustainable demand for journey”. I do not likely know what meaning: is “constructive” a synonym for rising, or not? However whereas the language just isn’t useful, the temper appears to be one in every of optimism.
Set in opposition to that, nonetheless, I additionally see some dangers this 12 months. A number of giant economies are both performing weakly or have lately been in a recession. Extra could comply with.
That, mixed with constrained shopper spending, might imply weaker demand for leisure journey. On high of that, enterprise journey demand continues to be weak in comparison with earlier than the pandemic.
IAG’s strategic decisions are a priority for me
On high of these broader dangers, I really feel IAG has lengthy been making some strategic decisions that would additionally harm demand at a few of its airways, comparable to British Airways.
It has been making an attempt to enhance points of the passenger expertise. However after years of price reducing ate into passenger loyalty, I feel IAG has misplaced the ability of a few of its manufacturers – maybe endlessly.
On high of that, current adjustments introduced to BA’s loyalty programme appear to have gone down like a lead balloon with a number of frequent flyers. That would harm demand additional.
Right here’s why I’m not investing
On high of extra foreseeable exterior demand dangers like a weak economic system, I’m additionally involved about ones which might be much less simple to identify. For instance, one other pandemic or terrorist assault might badly harm civil aviation demand in a single day.
That places me off investing in airways typically. I’ve made exceptions earlier than (together with proudly owning IAG shares).
However whereas I see additional area for IAG shares to maneuver up in worth in coming months, the dangers right here don’t sit comfortably with me. So I’ve no plans to speculate.
