Why isn’t the IAG share price rallying?

Jon Smith explains several reasons why the IAG share price has underperformed recently, but why he believes a strong rally is coming shortly.

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With the airline sector enjoying the benefits now we have come out of the pandemic, travel bookings have risen. International Consolidated Airlines Group (LSE:IAG) has benefitted and has flipped from posting losses to being back in profit. Yet the IAG share price is down 6% over the past year and lacking any kind of spark. Here’s what I think is going on.

Some caution from recent results

Even though the full-year results for 2023 were strong, I think there’s still some hesitation that the airline is completely out of the woods. Even though capacity is now back at pre-Covid levels, the impact of the pandemic can still be seen financially.

For example, the total liabilities for last year hit €34.4bn. Yet in the 2019 results (the last full year before the pandemic), the same figure was €28.6bn. So it’s clear that the measures taken to shore up the business during tough times are still issues for the firm.

The other factor to consider is higher costs. Wage inflation meant that employee costs rose by 16.7% in 2023 versus 2022. Fuel and oil costs also rose by 23.5% year on year. The business needs to ensure that these are kept under control, otherwise future profitability could quickly be eaten up.

Broader market sentiment

Part of the problem isn’t purely related to IAG, but rather the UK stock market in general. Over the past year, the FTSE 100 index is down by 3.3%. Investor sentiment isn’t that strong.

Although most of the FTSE 100 companies (like IAG) trade around the world, the index is still seen as a general reflection of how well the UK economy is doing. Or at least the confidence that investors have in wanting to park their money in the UK.

Given that we were in a recession in late 2023, I think that there’s a bit of a cloud hanging over the market. Naturally, this will impact IAG stock, even though the company itself is doing well.

A coiled spring

Despite all of the above, I believe that it’s only a matter of time before the share price starts to rally. The above risks are valid, but we’re talking about a business that just posted a full-year operating profit above the 2019 figure for the first time.

With capacity booked at 92% for Q1 and 62% for H1, the outlook is positive.

Further, the business is now more balanced in revenue generation. For example, the Spanish businesses delivered €1.4bn of operating profit in 2023, up sharply from the 2022 figure of €0.6bn.

With a price-to-earnings ratio of 3.34, the stock looks undervalued to me. Granted, the lack of a rally over the past year tells me that it could take time before it starts to move higher. But I struggle to see it being this low in the long run. As a result, I think investors should consider the stock for their portfolios.

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.

Jon Smith 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.

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