International Consolidated Airlines’ (LSE: IAG) share price has risen 105% from its 4 October 12-month traded low of £1.87. In fact, it is now at levels not seen since the first UK Covid lockdown was announced in March 2020.
After that, the British Airways owner’s stock unsurprisingly plummeted as passenger numbers did the same until the end of 2021. Just a couple of months later, Russia’s invasion of Ukraine caused jet fuel prices to spike. This kept the stock price under pressure.
That said, just because it is back to where it was does not mean more price gains will not come. There could still be a lot of value left in the underlying business, which could power such rises.
Identifying this gap between a stock’s price and its value is key to making major long-term profits, in my experience (this comprises years as a senior investment bank trader and decades as a private investor). To find out if this is true here, I re-examined the business and ran the key numbers.
How’s its earnings growth potential?
Earnings growth ultimately powers any company’s stock price higher over the long term.
A risk to IAG’s is the intense competition in the sector that might pressure its margins. That said, consensus analysts’ forecasts are that IAG’s earnings will grow by 4.7% a year to the end of 2027. Additionally, return on equity is forecast to be 26.3% by that time.
The airline is targeting medium-term (from 2024 to the beginning of 2027) operating margins of 12-15%. It also aims for a return on invested capital (ROIC) of 13-16%.
ROIC is very similar to return on capital employed. The former is net operating income divided by invested capital while the latter is net operating income divided by capital employed.
The firm believes increasing British Airways’ margin from 2024’s 14.2% to 15% will be key in achieving these objectives. It believes another crucial factor will be increasing Iberia’s operating profit to €1.4bn, from €1.027bn last year. And it thinks that growing its ‘IAG Loyalty’ scheme will be another critical element here.
How have the recent results looked?
IAG was virtually back to pre-Covid operational levels by the time of its full-year 2023 numbers. Specifically, in the year before Covid hit, its operating profit was €3.3bn (£2.86bn), and its net debt was €6.4bn.
In its 2023 results, its operating profit was €3.5bn and net debt was €9.2bn. By the time of its nine-month 2024 report, even this net debt figure had shrunk to pre-Covid levels, at just €6.2bn.
In its most recent results – half-year 2025 released on 1 August — its operating profit increased 43.5% year on year to €1.878bn. Its net debt fell 27% to €5.459bn.
My investment view
A discounted cash flow valuation shows IAG shares are now 66% undervalued at their current £3.84 price. Therefore, their fair value is £11.29.
At my age of 50+, I think the airline sector is broadly too risky for me. This includes threats from rising fuel costs, further pandemics, and conflict-related closure of routes. At my late stage in the investment cycle, I do not want to wait for stocks to recover from any shocks.
However, I think IAG is well worth the consideration of less risk-averse investors, given its huge undervaluation.
