The IAG share price is dirt cheap and profits are flying. So why am I worried?

After today’s positive full-year results, I expected the International Consolidated Airlines Group (IAG) share price to be doing better than this.

| More on:
Young Black woman looking concerned while in front of her laptop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The International Consolidated Airlines Group (LSE: IAG) share price has inflicted severe pain on investors for years but not today. When I began writing this, the shares were up 2.5% in early trading after its full-year 2023 results reports “strong and sustained demand for travel” following a tough few years.

Few – if any – industries were hit harder by Covid lockdowns than airlines. The share price has plunged 61.52% over five years and 1.28% over 12 months. Post-pandemic volatility has dragged on and the cost-of-living crisis hasn’t helped.

Yet today the sun finally appears to be shining on the group, which owns British Airways, Iberia, Vueling, and Aer Lingus.

Is this stock finally on the up?

Full-year revenues jumped by 27.7% to €29.45bn, with operating profits soaring almost 175% to €3.51bn. Operating margins more than doubled from 5.4% in 2022 to 11.9%.

The company’s balance sheet looks a lot more solid, too, with strong free cash flow generation of €1.3bn. The ratio of debt to EBITDA (before exceptional items) fell from 3.1 times in 2022 to 1.7, below the board’s target of 1.8 over the cycle

Like the rest of the airline sector, including easyJet, which rejoined the FTSE 100 today, International Consolidated Airlines Group is slowly but surely putting the pandemic behind it. Capacity is almost back to pre-Covid levels in most core markets.

CEO Luis Gallego is now focusing on building long-term value by strengthening its core airline businesses and developing its successful IAG Loyalty scheme.

International Consolidated Airlines Group still has net debt of €9.25bn, albeit down from €10.39bn in 2022. City analysts reckon that will dip to €8.82bn in 2024. The group’s strong cash flows and solid debt-to-EBITDA ratio makes this debt less of a worry.

With a price-to-earnings ratio of just 3.88 times for 2023 and 4.57 times for 2024, the shares look shockingly cheap. It makes easyJet look expensive at 11.94 times earnings, while the sector average is around nine times.

International Consolidated Airlines Group won’t be paying any dividends in 2023, markets are looking forward to a resumption in 2024, when the stock is forecast to yield 1.87%. That’s not bad for starters.

Investors still seem sceptical

Would I buy it today? The outlook could get even better if inflation falls and interest rate cuts start to flow, putting money into customers’ pockets. Plus the cost of servicing its debts will fall.

At the same time, the sector is volatile by nature. Airlines have high fixed costs, and are vulnerable to events beyond their control, from economic or geopolitical worries, to potential strikes, bad weather and safety issues. A surge in the oil price, if the Red Sea crisis intensifies, is possibly today’s biggest concern.

Also, I’m a little baffled about the share price’s lack of spark. Investors seem incredibly sceptical about its prospects, which makes me worried that I’m missing something.

In fact, while writing this, the share has already given up its early gains and is down 0.45%. Clearly, I’m not the only one in two minds. I won’t buy it today while I dig deeper and gauge the market reaction. The IAG share price looks a bit too cheap for its own good.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones 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.

More on Investing Articles

Fans of Warren Buffett taking his photo
Investing Articles

2 reasons Warren Buffett might love this stock, and 1 reason he might avoid it like the plague

Warren Buffett's one of the best stock pickers of all time. But would he approve of Barclays shares? This Fool…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Down 28% in a week! What’s going on with the share price of this FTSE 250 British icon?

There’s one stock in the FTSE 250 that took a bit of a battering last week. But I’m not surprised,…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

At around £28.50, Shell’s share price looks cheap to me

Shell’s share price still looks undervalued against its fossil-fuel-focused rivals to me, despite it pushing back its carbon reduction targets.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

433 shares in this FTSE 100 dividend superstar could make me £18,803 in annual passive income!

This overlooked FTSE 100 gem has one of the best yields in the index, looks undervalued, and makes me big…

Read more »

Investing Articles

2 under-the-radar investment trusts I’d buy for a new Stocks and Shares ISA

Here are two fantastic trusts that I'd happily snap up today if I were building a Stocks and Shares ISA…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

If I’d put £1k in Games Workshop shares 5 years ago, here’s how much I’d have now!

Games Workshop shares have proved to be a stellar investment in recent years. Charlie Carman examines whether this trend can…

Read more »

White female supervisor working at an oil rig
Investing Articles

With the Middle East in crisis, will the BP share price soar?

The BP share price has leapt by a sixth, surging 16.7% since the lows of late January. Will it gush…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

If I’d put £5,000 into Santander shares 1 year ago, here’s how much I’d have now

Santander shares have outperformed over the past 12 months, leaving this Fool wondering if he should add the bank stock…

Read more »