15 analysts say the IAG share price is discounted 41.7%

The IAG share price is moving in the wrong direction, but it remains our writer’s favourite aviation stock. Other analysts are bullish too.

| More on:
Young black colleagues high-fiving each other at work

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 IAG (LSE:IAG) share price is below where it should be. That’s what analysts are saying with their £2.30 price target, which reflects a 41.7% premium to the current share price.

This is one of the biggest valuation gaps I’ve come across on the FTSE 100 in recent months. And while analysts can be wrong, it’s important to remember this is the consensus opinion of all 15 analysts covering the stock.

The stock currently has 11 Buy or Outperform ratings and just four Holds. No analysts have rated this airline operator as a Sell.

Don’t take their word for it

As I mentioned, analysts from major financial institutions can be way off in their predictions. And while I do put a good amount of faith in the consensus, it’s always worthwhile following up by undertaking your own analysis.

So are IAG shares undervalued? Well, starting with the similar metrics, IAG trades with a price-to-earnings (P/E) ratio of just 4.35 times. I know that’s enough to catch the eye of most UK investors, but let’s dive further.

It’s worth noting that there’s little point investing in company with a low P/E if it doesn’t pay a dividend or if its earnings are going backwards. Thankfully, IAG’s earnings are growing.

The P/E ratio is set to fall to 3.93 times in 2025 and 3.73 times in 2026. Moreover, we could see the return of a meaningful dividend in the medium term, thus improving the overall returns of the stock.

The P/E ratio’s a little basic. It doesn’t take into account debt. While several of IAG’s peers are debt free, IAG has €7.4bn of debt, and this needs to be taken into account.

IAG’s EV-to-EBITDA ratio — which takes debt into account — is 3.11 times for 2024, 2.82 times for 2025, and 2.58 times for 2026. This puts it pretty much in line with debt-free peer easyJet, and much cheaper than other peers.

One word of caution. The aviation industry’s been hit by multiple shocks in recent years — the pandemic, Russia-related fuel price spikes — and I believe this is still weighing on the share price.

Geopolitics is always a factor when fuel’s involved. As fuel represents 25% of IAG’s costs, rising prices would represent a risk to the business.

Considerations for the industry

One reason I like easyJet at the moment is because it offers total shelter from Boeing.

For those readers that haven’t been following, Boeing has had some high-profile safety incidents in 2024, compounding concerns about airworthiness following the MCAS failures that led to two deadly crashes.

IAG does have a handful of Boeing 777-200 and 777-300, as well as the 787-8, however the majority of the fleet are Airbus aircraft. This puts both IAG and easyJet in my good books.

While easyJet also currently looks like a good option, my preference remains for IAG. While easyJet’s market’s more focused on low-cost and tourism, IAG’s more diverse in its operations.

IAG, the parent company of British Airways, Iberia, Aer Lingus, and Vueling, operates across multiple segments, including both premium and budget travel.

This diversity represents a more robust business model that can weather market fluctuations more effectively. I’m considering the stock and feel that other investors should do so too.

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.

James Fox has positions in International Consolidated Airlines Group. 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

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »