I’m delighted the IAG (LSE:IAG) share price is surging this year. Not only is it my largest airline holding, but I said it was potentially the most undervalued stock on the FTSE 100 at the start of the year.
Despite being up 57% since the start of 2024, I certainly believe this stock can push further. It’s the top-listed UK stock, according to certain quantitive models, and it remains highly rated by Wall Street and City analysts.
Let’s take a closer look.
IAG’s figures are really strong
IAG stock still looks cheap. It’s trading at 5.6 times forward earnings, representing a 74% discount to the industrial sector and a circa 50% discount to its US-listed peers. This rises to 5.9 times in 2025 and then falls to 5.1 times in 2026.
The price-to-earnings (P/E) ratio highlights that while airlines operate in cyclical sectors — the growth isn’t linear — the company will grow earnings over the long run.
Broadly, the data also suggests that IAG will grow earnings faster than most of its peers, and has one of the strongest gross profit and EBIT margins. In fact, it’s topping the industry in pretty much all metrics across near-term value, profitability and sales growth.
I will however, introduce one caveat here. Earnings growth has been notoriously hard to forecast in this sector. That’s because fuel, which has been a very volatile commodity in recent years, represents around 25% of operating costs.
While IAG — and other European airlines — buy fuel in advance (hedging), it’s still partially exposed to near-term fluctuation.
Analysts are bullish
City and Wall Street analysts rate this stock highly. There are seven Buy ratings, four Outperform ratings, and six Hold ratings. Shares are also trading 11% below the average share price target. These numbers are positive but I’m expecting these rating and share price targets will be upgraded given the better-than-expected Q3 earnings.
Food for thought
Going into 2025, there are a host of variables that could alter the earnings trajectory of IAG and its peers. Potentially the most obvious of these is interest rates and the impact of falling borrowing costs on consumer spending.
In theory, the faster interest rates fall, the more people will spend on travel. This should have a positive impact on revenue per available seat mile (RASM) and, in turn, earnings.
On the cost side, we’re currently seeing some weakness (slowing demand and falling prices) in oil and this could feed through to lower fuel prices. Oil prices are artificially higher because of unresolved conflicts in Ukraine and the Middle East.
I’m optimistic that we’ll see an end to conflicts in 2025, and that interest rates will continue to fall (in Europe at least) in line with forecasts. However, it’s possible that things could play out differently. Higher for longer interest rates, surging oil prices as conflicts become hotter, and a prolonged lack of access to Russian airspace.
Investing is never straightforward, but I prefer to focus on the quantitative data in the first section of this article. It takes the guesswork out of investing. If IAG wasn’t already well represented in my portfolio, I’d buy more.
