IAG (LSE:IAG) stock has fallen 14% over the past month, marking a notable contrast to last year’s gains. As such, a £10,000 investment one month ago would now be worth £8,600. That’s obviously not the direction people would want to see their investments moving.
Still a good investment?
A year ago, IAG was my top pick on the FTSE 100 and it’s up 108% over 12 months. I feel vindicated. But is it still a good pick today?
Well, IAG currently trades with a forward price-to-earnings (P/E) ratio of just 6.3 times. That’s compared to the industrials sector average of 17.4 times. The global airlines industry average is around 10 times. These both suggest the presence of a valuation gap.
This discount persists despite the company’s impressive earnings growth and returning dividends. What makes this valuation particularly intriguing is that IAG operates in many of the same markets as its more highly-valued US counterparts. This is especially true in the lucrative North and South Atlantic routes where the group has established strong positioning. Moreover, IAG’s modern fleet provides fuel efficiency advantages compared to many competitors, addressing both cost and environmental considerations.
The company’s transformation strategy, particularly British Airways’ ambitious £7bn plan to improve operations, experience, and service, supports analysts’ expectations that IAG will continue to improve margins. Financial projections appear robust, with analysts projecting earnings to increase by high single digits throughout the medium term.
Analysts remain overwhelmingly positive on IAG’s prospects, with the most recent ratings showing a bullish consensus. The stock currently trades around 20% below its average analyst price target of €4.61, suggesting reasonable appreciation potential even after its strong performance in 2024.
For investors seeking exposure to the aviation sector, IAG’s combination of discounted valuation, strong returns on capital, and clear path to margin improvement makes it an attractive opportunity in early 2025. This is despite the inherent cyclicality of the airline industry. However, I believe investors will need to keep an eye on Trump’s tariffs and the impact this may have on global trade and demand for travel — notably business travel where IAG often performs well.
Personally, I’m continuing to hold my IAG shares, which are well-represented within my portfolio, rather than buying more. That’s partially because I think there’s a better alternative on the FTSE AIM.
The alternative
Jet2 (LSE:JET2) presents a compelling alternative to IAG in the aviation sector, with its exceptional net cash position standing as a remarkable strength. Projected to grow from £1.7bn in 2024 to £2.8bn by 2027, this financial cushion differentiates Jet2 in the capital-intensive airline industry. It will help fund strategic expansions including a 9% seat capacity increase for summer 2025.
The company’s valuation metrics suggest significant growth potential. With a forward EV-to-EBITDA ratio of 1.9 times for 2024, expected to decrease to 0.37 times by 2027 — substantially below IAG’s 4.7 times — the market appears to undervalue Jet2’s earnings potential and substantial cash reserves.
However, investors should note recent cautionary signals regarding forecast reliability. The company faces typical industry challenges including fuel price sensitivity and demand volatility. Additionally, Jet2’s older fleet (13.9 years average age) and lower profit margins (17.7% vs. IAG’s 27%) present operational considerations that could impact future performance despite its otherwise robust financial position. Nonetheless, I recently took a position in the company. It’s simply undervalued.
