The FTSE 100 is home to several companies that haven’t truly recovered from a series of economic shocks, including the pandemic, Brexit, and Russia’s invasion of Ukraine.
One of those companies is airline operator IAG (LSE:IAG).
The stock stumbled on Brexit worries, slumped during the pandemic, and has suffered from elevated aviation fuel prices following Russia’s invasion.
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However, it’s now a business that is moving in the right direction.
Brokers say it’s ‘undervalued’
IAG is one of the most undervalued companies on the FTSE 100 according to brokers and analysts covering the stock.
In fact, the average share price target is approximately 39% above the current share price. At £1.65, the stock is some distance below the target of £2.22.
It’s interesting to note that even the lowest share price target is £1.71. That’s a premium to the current share price, and a very good sign that the least bullish analysts still thinks fair value is upwards.
The highest price target is £4.50. That’s pretty much where the stock used to be before the pandemic, and it would represent 173% growth.
In short, some analysts think this stock could skyrocket.
It’s not expensive
IAG stock is certainly not expensive. Yes, cyclical stocks like airlines tend to trade with relatively low multiples, but given the current climate, the valuation is very attractive.
The British Airways owner is trading at 4.3 times expected earnings for 2024, four times projected earnings for 2025, and 3.8 times earnings for 2026.
And while there is some debt, on an enterprise-value-to-EBITDA ratio, it still looks cheap, at 3.1 times for 2024, 2.8 times for 2025, and 2.5 times for 2026.
These figures are obviously very cheap for the FTSE 100, and would normally suggest that something is wrong or maybe we’re missing something.
But that’s not the case. I simply think investors are wary of investing in a sector that was hammered in recent years.
It’s also the case that there are several geopolitical risks that could push fuel prices higher. Notably the expansion of conflict in the Middle East.
Ready for takeoff?
I’m under no illusion that IAG shares have promised so much in recent years, but haven’t delivered.
However, there are a couple of potential supportive trends that may help push IAG shares higher.
The first of these is falling interest rates. Typically, when interest rates fall, we start to see more disposable income, and this leads to an increase in discretionary spending.
This could represent a boost for demand.
Next, there’s the Trump Trade. In a recent interview, Trump said oil prices are twice as high as they should be, and that he’d bring them right down.
Aviation fuel prices have been elevated since Russia invaded Ukraine. Could Trump’s deregulation and oil pumping agenda bring prices down? It’s quite possible, but he’d also need to address the risks that could push oil higher, e.g., Middle East conflict.
Remember, aviation fuel represents around 25% of total costs.
