Following three terrible years for the airline sector, 2023 and 2024 have seen International Consolidated Airlines’ (LSE: IAG) share price bounce back.
It plunged from around £6 before the pandemic escalated in January 2020 to under £1 within a few months. Global passenger numbers tumbled 90% that year and in 2021.
Now though, the British Airways owner’s shares have gained 71% from their 18 January 12-month traded low of £1.41. However, key stock valuation measures lmake me think they will still go a lot higher.
How much higher could the shares go?
On the key price-to-earnings ratio (P/E) of stock valuation, IAG currently trades at just 4.9. This is bottom of its competitor group, which has an average P/E of 8.6. So IAG looks very cheap on this basis.
The same can be said for its price-to-sales ratio of only 0.4 against its competitors’ average of 0.6.
To translate this into share price terms, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows the stock is 67% undervalued at its present £2.41 price.
Therefore, the fair value of the shares is £7.30. They might go lower or higher than that, given the vagaries of the market, of course. But it emphasises to me how much of a bargain the stock still appears.
How does the business look now?
The airline sector is subject to multiple risks and IAG is not exempt from these. Its fuel costs may spike on several factors, including a widening of the present conflict in the Middle East, for instance.
There may be another pandemic of some sort that causes passenger numbers to tumble again. Or they may do so if there is a resurgence in the cost of living.
That said, IAG posted another strong set of results in Q3. Revenue increased 7.9% year on year to €9.3bn (£7.8bn). Operating profit jumped 15.4% to €2bn. And operating margin rose 1.4% to 21.6%.
Over the medium term it aims to achieve operating margins of 12%-15% and return on invested capital of 13%-16%. It forecasts capacity growth of 4%-5% to the end of 2026.
Will I buy the shares?
The earlier a person is in their lifetime investment cycle, the more risk they can afford to take, I think. This is because there is more time available for shares and stock markets to bounce back from setbacks.
I have been investing privately for around 35 years, so am toward the latter part of that cycle. And I think airline stocks are at the riskier end of the stock investment spectrum, so they are not for me.
Additionally, I focus on shares with high yields. Analysts forecast IAG’s yield will be 3.5% in 2025 and 3.8% in 2026.
These are in line with the current 3.6% FTSE 100 average but are way below the 8%+ average my high-yield shares generate. So they are not for me on this basis either.
That said, if I were at an earlier stage of the investment cycle, I would buy them. The firm is likely to keep growing, in my view, driving the share price and dividend higher over time.
This post was originally published on Motley Fool
