The International Airlines Group (LSE:IAG) share price surged in 2024, and the evidence suggests it could go much higher again in 2025. The airline operator is the top-rated UK stock according to many quantitative models and analysts have some fairly bullish expectations.
Valuation madness
For much of 2024, the share price was sitting around 150p. It was trading around four times forward earnings versus around 13 times for Nasdaq-listed Ryanair. Even for a cyclical stock, this was absolute madness, I feel.
Fast forward to today, and the stock continues to trade at discount to its US-listed peers. What’s particularly interesting is that through its airlines like British Airways and Iberia, it serves many of the same markets as its US-listed peers. And through Vueling, it has a direct competitor to Ryanair.
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What’s more, while Ryanair might appear like a well-oiled machine with a clear focus on the budget air travel market and only operating one platform of aircraft, IAG is actually operating with some of the very best returns in the industry. The forecasts suggest it will top the sector for returns on capital in the coming years.
There are no looming debt issues and problems with the company’s fleet of aircraft either. In fact, the FTSE 100 company operates a relatively modern fleet compared with many of its peers, providing fuel efficiency advantages.
A favourite among analysts
Institutional analysts, those from banks and brokerages, are typically very bullish on this airline stock. There are currently nine Buy ratings, four Outperform ratings, and four Hold ratings. The stock is trading around 10% behind its average share price target. However, it’s certainly worth noting that the most recent ratings from analysts have been bullish, with more Buy ratings and higher price targets.
The highest share price target is now 500p — 70% above the current share price — after Panmure Liberum analysts picked IAG shares as their ‘most preferred’ stock within transport on 6 January. Panmure Liberum’s analyst Gerald Khoo argues that IAG’s current valuation is “wholly unreflective” of the firm’s strong return on capital and margins that are double those of its peers.
Khoo is particularly optimistic about its £7bn transformation plan, strong market positioning across North and South Atlantic routes, and strategic hubs at London Heathrow and Madrid Barajas. He added that the potential for British Airways to improve its operating margins from 10% to 15% by 2027, combined with limited aircraft supply supporting pricing power and resilient demand, underpins the bullish outlook.
The bottom line
IAG is more exposed to some Europe-specific pressures than its American counterparts. For instance, the war in Ukraine and the subsequent ban of Western aircraft in Russian airspace has made certain Europe-Asia routes significantly less profitable. This compounds global sector risks including the risks of higher fuel prices emanating from conflicts.
However, at seven times forward earnings, IAG trades at a discount to the sector. While UK-listed stocks typically trade at a discount to their US-listed peers, I see no good reason why this company, with global operations, should be discounted. Personally, I consider it to be one of the few UK-listed stocks I’d buy, but I already have a substantial holding.
