The International Consolidated Airlines Group (LSE: IAG) share price has had a stellar year. Its shares have rocketed 128% over the last 12 months. That’s the fastest growth on the FTSE 100.
Usually, when a share does that well, I stand clear. Basically, I feel like I’ve missed the excitement and should look elsewhere for my next recovery play.
But then I think of aircraft engine maker Rolls-Royce (LSE: RR). After years of turmoil, its shares took off in the autumn of 2022. In the first 12 months of the recovery phase they shot up around 175%.
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I had a small stake and was tempted to buy more. Instead, I decided the fun was over. But I was wrong. They grew another 200% the next year as more investors piled in.
I need to rethink momentum stocks
The Rolls-Royce share price has now slowed. It’s up ‘just’ 95% over the last 12 months. I’ll hold what I have but won’t buy more. But is there still time to hop on board IAG?
Both IAG and Rolls-Royce took a severe beating in the pandemic when global fleets were grounded. But with the skies reopening and miles flown returning to pre-Covid levels, their fortunes have rebounded.
Rolls-Royce flew first, given an extra boost by the appointment of transformative CEO Tufan Erginbilgiç. His shock therapy sent a charge through investors who had grown accustomed to years of underachievement.
IAG doesn’t have a Erginbilgiç. Which may be one reason why it’s lagged. Its shares were dirt cheap for years, trading around three or four times earnings. Many investors were put off by the company’s debt pile, but that’s under control at around €6bn, and falling. Now momentum’s building.
Transatlantic routes are particularly strong, which is good news for IAG’s flagship brand British Airways. US bullishness under Donald Trump may help here. European brands Iberia and Aer Lingus are trailing, albeit picking up.
The IAG board’s been working hard to cut costs, and profits margins are improving with leaner operations and higher load factors.
I’m expecting more growth
There are risks, of course. Airlines are plugged into wide and global economic sentiment. If inflation and interest rates stay high and consumers feel poorer, demand could fall. The same could happen if the ‘Trump bump’ reverses now he’s in power.
The oil price has also nudged up to $80 a barrel. If it rises higher, that will squeeze IAG’s margins.
Yet IAG shares still look good to go with a price-to-earnings (P/E) ratio of just 7.7. That’s roughly half the FTSE 100 average. Today’s share price of 330p is roughly 25% below the pre-Covid peak of 435p.
By contrast, Rolls-Royce shares are pricey with a P/E of more than 43 times. I think its rapid recovery phase is over. There are challenges ahead, amid technical issues on its Trent 1000 engines and the battle to win regulatory approval for its mini nuclear reactors. Starting from a lower base, I think the IAG share price ceiling’s much higher.
With no cash in my portfolio, I’ll have to sell something. Once I’ve identified which stock goes, I’ll buy IAG. So to answer my own question, yes, I do think it could do a Rolls-Royce. No guarantees, of course.
