Over 12 months, the IAG (LSE:IAG) share price is up 13.8%. The airline operator has staged something of a recovery, but it’s nowhere near the 457p the shares traded for in early 2020.
The next milestone for investors is 200p. That’s 29% ahead of the current share price, but below the average share price target of 211p.
So, will we see 200p anytime soon? Here are some of my thoughts.
Valuation
IAG has strong valuation metrics. With a 4.3 trailing 12-months (TTM) earnings multiple and a four times forward earnings multiple, the company is priced at a 78% discount compared to the industrial average.
Across various near-term metrics, IAG maintains an appealing valuation. The forward EV-to-EBITDA ratio, which accounts for debt, is impressively low at 3.1 times, reflecting a substantial 72% discount relative to the industrial average.
As such, IAG looks like an attractive pick.
However, it’s worth noting that growth isn’t expected to be particularly strong in the coming years. And that’s an issue because investors don’t like putting their money in companies that are going backwards.
| 2023 | 2024 | 2025 | |
| Earnings per share (¢) | 46 | 35 | 40 |
By comparison, Ryanair trades at 10.7 times earnings. It does have a better earnings forecast, but it’s facing challenges of its own, including a delayed order from Boeing.
Fuel
The main reason analysts expect to see earnings per share (EPS) fall in 2024 is fuel prices. Fuel represents 25% of total costs.
One interesting thing to note that while IAG has a hedging strategy — most European airlines do — its American counterparts don’t.
While this may sound like a competitive advantage, especially on transatlantic routes, it’s not as great as it seems.
IAG, which owns Iberia and British Airways, has a joint business with American Airlines and Finnair. And at the end of each quarter, they pool profits.
As such, American Airlines could be something of a drag on the profitability of North American routes.
Despite this, I’d expect IAG to have some competitive advantage over the rest of its peers in North America. I’m certainly interested to see how this plays out.
Demand
Demand for air travel, particularly within the leisure sector, is booming. That’s especially the case for premium leisure where margins are highest.
Of course, a downturn in economic fortunes will likely see demand dip, but since the pandemic, demand has been more robust than anyone anticipated.
The unexpected strength in demand can be attributed to various factors, including pent-up travel demand, increased vaccination rates fostering traveler confidence, and the reopening or re-emergence of certain destinations.
My take
Expectations are low for 2024. And in my opinion, perhaps too low.
IAG is going to have a competitive advantage in many of its transatlantic routes and demand, across the board, has shown very few signs of slowing down.
I think we’ll need to see IAG beat quarterly earnings expectations before the stock pushes forward. And that’s very hard to forecast, although the forecasts set a low bar.
At four times forward earnings, the stock is phenomenally cheap. But I’m not sure we’ll see 200p a share in 2024 unless performance outpaces the forecasts.
Nonetheless, I’m considering buying more IAG shares. It’s a top-rated stock, with great brands and a strong financial position.
