Does a P/E ratio of simply 7 make the IAG share value a discount?

One of many valuation metrics I have a look at when contemplating a share for my portfolio is its price-to-earnings (P/E) ratio. On the whole, the decrease the P/E ratio, the cheaper a share could also be. For instance, for the time being the Worldwide Consolidated Airways Group (LSE: IAG) share value is round seven occasions its annual earnings per share.

Such a single digit P/E ratio is usually thought-about low cost. Easyjet has a P/E ratio of 11, for instance, whereas Wizz Air is on a whizzier 19.

However does that P/E ratio actually imply IAG is the kind of discount share I want to scoop up for my portfolio?

P/E ratios solely inform one a part of the story

Whereas a P/E ratio can assist when valuing a share, it solely tells one a part of the story. One other essential factor for a would-be investor to do is have a look at the agency’s steadiness sheet.

It might be that an organization has sturdy earnings however a lot internet debt that these earnings will find yourself getting used to service it, not reward shareholders. Or, extra hardly ever, an organization might have a excessive P/E ratio however a lot internet money that it’s nonetheless a discount.

IAG ended the primary quarter with €6.1bn of internet debt. That was €1.4bn lower than on the identical level final yr, however remains to be substantial.

Future earnings may maintain flying excessive – or not

One other issue to contemplate is the earnings themselves. The P/E ratio of seven relies on final yr’s earnings per share. However IAG’s earnings per share have moved round so much over the previous few years, in frequent with lots of its rivals.

Final yr’s diluted earnings per share had been the very best of the previous 5 years. That interval included two years when the corporate made a loss not a revenue.

A technique of taking a look at that is that the dangerous occasions are actually previously, with civil aviation demand having staged a powerful restoration and IAG as soon as once more producing massive earnings. 

It might be that that continues to be the case. IAG has well-known manufacturers, sturdy positions in a number of European markets the place it owns the flag service and has additionally been a ruthless cost-cutter through the years.

Though I believe these are all property that would assist assist the IAG share value, I don’t see the inconsistent efficiency as a blip. Quite, I believe that it displays the dangers inherent in working an airline enterprise — or investing in a single.

Demand can come and go for all method of causes together with exterior ones similar to a pandemic, volcanic clouds, recession or terrorist assault. In the meantime, airways are usually lumbered with sizeable mounted prices no matter is going on to passenger demand.

So whereas I believe the IAG share value is a discount primarily based on present earnings, my concern is whether or not these earnings are sustainable over the medium- to long-term.

I’ve been bitten by airline shares earlier than and am twice shy, so won’t be shopping for IAG shares regardless of the seemingly low cost value.