British Airways-owner International Consolidated Airlines’ (LSE: IAG) share price is down 11% from its 14 May 12-month traded high of £1.87. It is now trading on the key price-to-earnings ratio (P/E) of stock valuation at just 3.6. This compares to its peer average of 7.2.
This is the bottom of the group, which comprises Wizz Air at 5.1, Jet2 at 7.1, Singapore Airlines at 7.9, and easyJet at 8.7.
To find out how cheap it is, I ran a discounted cash flow analysis using other analysts’ figures and my own.
It shows IAG shares to be 73% undervalued at their current price of £1.67. So a fair value for the stock would be £6.19.
Interestingly, this is almost exactly where the shares were trading before Covid struck in early 2020. In effect, the valuation is saying that the company’s commercial prospects are broadly the same as they were then.
I agree with this, based on the firm’s results over the past year or so.
Back to black
IAG returned to the black in the first half of 2022 for the first time since 2019. It posted a Q2 2022 profit of €293m (£251m) against a €967m loss in Q2 2021.
In 2023, operating profits soared to €3.5bn and operating margin more than doubled to 11.9%. Capacity at that point had recovered close to pre-Covid levels in most of its core markets.
Its H1 2024 results released on 1 August showed revenue up 8.4% on the same period last year — to €14.274bn. Operating profit rose 3.9% to €1.309bn, and net debt dropped 31% to €6.417bn. These numbers prompted the firm to reinstate a dividend — €3 a share – for the first time since 2019.
IAG’s medium-term strategy is to achieve operating margins of 12%-15% and return on invested capital of 13%-16%. It forecasts capacity growth of 4%-5% to the end of 2026.
Consensus analysts’ estimates are for earnings and revenue increases respectively of 5.8% and 3.7% annually to that year. Return on equity is forecast to be 29.2% by that time.
A primary risk to these numbers might be a new pandemic or a widening of the existing conflicts in Europe and/or the Middle East. Since the war in Ukraine, Western airlines have avoided the shorter – and less expensive – route across Russian air space to several Asian destinations, for example.
Right share, wrong time for me
Aged over 50 now, I am looking to increasingly live off dividend income and further reduce my working commitments.
This means focusing on high-quality shares that pay a very high dividend. My current portfolio geared to this end pays an average return of over 9%.
IAG has just begun the process of paying regular dividends, so it is no use to me on that front.
That said, if I were even 10 years younger, I would buy the stock.
It has bounced back robustly from the Covid years and looks set for very strong growth to me.
Given this, the shares look too cheap to ignore and this undervaluation is unlikely to endure, in my view.
