The International Consolidated Airlines (LSE: IAG) share price is down 63% in the past five years.
While others related to aviation, like Rolls-Royce Holdings, have stormed back since the 2020 stock market crash, International Consolidated remains stubbornly low.
Cheap
Forecasts put the price-to-earnings (P/E) ratio at only 4.5.
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With the FTSE 100‘s long-term average P/E up around 15, doesn’t that make it look screaming cheap? Well, if forecasts are bad, a stock can deserve such a low valuation.
But, wait… they’re not.
Analysts see earnings dip slightly this year, but then turn steady. If they’re right, we could see the IAG P/E down as low 3.9 by 2026.
Oh, and the City folk have a returning dividend penciled in, rising to a 4.2% yield by 2026 too. Why aren’t investors buying the shares hand over fist?
Debt
There is one thing that I think will be keeping a lot of investors away, and it’s a big thing. It’s debt.
At the end of the first quarter, the owner of British Airways and Iberia had net debt of €7,438m (£6,289m). When we take that into account, it can mess with the underlying P/E value.
I work out a debt-adjusted forward P/E of about 7.9 for the current year. And the adjusted 2026 P/E would rise to 6.8, though that still looks attractive to me.
And this does assume that net debt won’t fall. But it has been falling, and the latest figure is down 20% from the first quarter of 2023. If that keeps going, those forecast valuations could start to look even sweeter.
Headwinds
Putting financials aside for the moment, there’s clearly one big barrier to airline success right now. Well, it’s lots of things really, all the things that are keeping people’s bums away from plane seats.
Inflation leaves people with less spare cash to spend on holidays. And then we need to be careful where we’re going.
Anywhere near Ukraine or Russia, and parts of the Middle East… a lot of folk won’t want flights that go anywhere near them. General global unrest can make staying at home seem like a very good idea.
On top of all that, fuel cost is one of the biggest drags on the industry. Oil isn’t cheap, and doesn’t look like falling.
Business
For years, I’ve disliked the airline business, for the main reasons that it competes only on price and has no control over most of its costs — like fuel.
Then again, every stock must have a price that it’s good to buy at, mustn’t it? Just like even the very best can become too expensive, the ones in the toughest businesses can surely become too cheap too, right?
That’s what I think I’m seeing at International Consolidated Airlines right now.
Whichever way I take it in, the share price just looks too cheap. And we did see passenger numbers growing in this recent update.
