IAG (LSE: IAG) shares have been up and down in the past 30 days. The resurgence of pandemic concerns seems to be a key driver behind this. The announcement of the Omicron variant on 25 November sent the share price tumbling almost 15% by the time markets closed. This trend spanned the whole industry with competitors easyJet and TUI both seeing double-digit drops too.
While IAG shares have fallen almost 12% in a year and 20% in the past 30 days, they jumped 8% last Monday. This was largely due to the Omicron virus concerns abating. These up and down price moves made me wonder whether now might be a good time to add IAG shares to my portfolio.
First, looking at valuations, IAG shares actually look quite cheap to me right now. The firm’s pre-pandemic share price was well over 400p. Currently sitting at 142p, it’s trading with a price-to-sales (P/S) ratio of 1.77. This is lower than competitors Wizz Air and Ryanair, which are at 4 and 6.51 P/S ratios, respectively. This signals to me that the IAG share price may be relatively undervalued compared to its rivals.
In addition to this, CEO Luis Gallego has said he believes “a significant recovery is under way and our teams are working hard to capture every opportunity”. If transatlantic flight routes continue to improve, the firm expects to return to profitability by summer 2022. If the firm can deliver some profitable results, I would expect IAG shares to rise as a consequence.
The bear case for IAG shares
One thing that worries me about IAG is the continuing impact that Covid is having on the balance sheet. Forced to take on almost £4bn in debts, this could weigh the firm down moving forward. What’s more, IAG released disappointing 2021 Q3 results in early November. Passenger revenue fell 35% compared to the same period in 2020. In addition to this, borrowings increased 24%, adding to its heavy debt pile.
While the Omicron variant may be less harmful than previously expected, it’s still causing major delays to the reopening of global travel routes. For example, Austria announced a full lockdown on 19 November. It seems the global reopening of travel routes is going to be an uphill battle for the travel industry, and IAG shares will have to bear the brunt of that.
Don’t get me wrong, IAG shares do look cheap. However, I think this is for a reason. The firm’s poor results, coupled with looming Covid fears are a big red flag for me. I do think the beaten-down travel industry could be a good investment opportunity, but for me it’s too risky to touch at the moment. I would wait to see how IAG performs over the next six months before considering adding shares to my portfolio.
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Dylan Hood 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.