Shares in International Airlines Group (LSE: IAG) are up 110% in the past year. That makes the group, which is parent to major airlines such as British Airways, Iberia, and Vueling, one of the best performing UK stocks.
An investment of £10,000 would be worth £21,168, with dividends included. That’s great news for investors who bought the shares a year ago but what does that mean for newcomers? Is there still value in the stock?
To evaluate where the stock might be headed, it’s worth looking into its recent earnings and checking valuation metrics.
Recent blue-sky earnings
IAG’s set to release its final results later this week with a significant impact on its share price going forward. In its Q3 results, revenue came in at €9.33bn, a 7.9% increase year on year, and operating profit hit €2.02bn, up 15.4% from the previous year.
The operating margin also improved to 21.6%, a 1.4% increase. The company also announced a €350m share buyback, reflecting strong performance and a commitment to shareholders.
Valuation metrics
When evaluating IAG as a potential investment, it’s worth considering the following key metrics. IAG’s current price-to-earnings (P/E) ratio is approximately 4.1, below the peer average of 12, so there could be more growth potential in the stock.
Its price-to-sales (P/S) ratio and price-to-book (P/B) ratios are similarly low at only 0.6 and 0.8 respectively, suggesting the current share price is significantly undervalued.
However, in the past two weeks, the price has declined by over 10%. This could be a minor pullback but could also be the start of a major price correction. It could also be evidence of weakening investor confidence if shareholders expect underwhelming Q4 results.
Analysts expect a 15% increase in annual profits when the results come out but the potential impact from fuel costs remain a critical concern. Which brings us to the risks the company faces.
Debt and disruption
To meet the challenge of rising fuel costs, IAG’s been investing in fuel efficient aircraft and optimising routes. This has shown some early signs of profitability but many other risks remain.
As the pandemic proved, the airline industry is highly susceptible to travel disruptions. These occur in many forms, such as strikes, unexpected maintenance costs and the impact of geopolitical issues on travel demand.
In addition, it faces tough competition from budget airlines like easyJet and Ryanair, both of which have become increasingly popular in recent years.
Managing these risks while reducing Covid-era debt is critical. In H1 of 2024, the company’s net debt stood at £13.66bn, down from £17bn in 2022. That’s almost double its cash and cash equivalents.
Long-term thinking
I’m annoyed I didn’t purchase IAG shares last year as they would have been quite profitable. I mulled it over but eventually chose to pursue other options.
Yet the hesitations that held me back then remain. The risks related to fuel costs and travel disruption are significant enough that I feel they outweigh the potential long-term benefits.
Combined with the now higher price, it’s not a stock I’ll consider unless results this Friday beat expectations considerably.
