Last year, I watched helplessly as the International Consolidated Airlines Group (LSE: IAG) share price flew to the stars. Other investors might have hopped on board, but I felt I’d missed my chance. I prefer to buy beaten-down FTSE 100 stocks before they rebound rather than afterwards, because often the first leg of the recovery is the strongest.
IAG, as it’s also known, plunged when Donald Trump announced his ‘liberation day’ tariffs on 2 April. That’s because the carrier has hefty exposure to the transatlantic flight trade via its British Airways subsidiary. When Trump announced a 90-day pause a week later, there was only one stock I was going to buy.
FTSE 100 comeback kid
As I anticipated, IAG shares led the recovery. I’m now up 55% in just over six months, one of those rare occasions when I got my timing spot on.
The share price is up 90% over the last 12 months and 255% over three years. Despite this, IAG trades on a lowly price-to-earnings ratio of just 8.3, less than half today’s FTSE 100 average of around 18.
Very low P/E ratio
Just a year or two back, IAG had a barely-there P/E of around three to four. Investors remained wary after the pandemic, when airlines had to borrow heavily to stay afloat. Airlines have huge fixed costs, and bills keep rolling in even when flights are grounded. Happily, IAG has worked its debt pile down to around €5.5bn, but I’d like to see that shrink further.
There’s no pandemic today, but airlines remain exposed to other shocks, such as recession, war, volatile fuel prices, volcanoes, weather events and technical faults. As a result, its P/E may continue to be on the low side.
Top stock pick
I was delighted to see Morgan Stanley name IAG its “top pick” among airlines on 15 October, citing its dominant position at London Heathrow, where it controls over half the slots. That gives it access to the world’s largest premium and corporate travel hub, supporting resilient premium demand and pricing power.
Half-year results published on 1 August show the positive direction of travel. Revenue rose 8% year on year to €15.9bn, while operating profits before exceptional items surged 43.5% to €1.88bn, with margins improving 2.9 percentage points to 11.8%.
The oil price may have picked up recently, but it’s expected to remain low for a year or two, keeping costs under control. The big risk is a stock market crash or US recession, and IAG would be on the front line. This is why we at The Motley Fool always urge investors to take a long-term view. Stocks face plenty of turbulence but over time they tend to battle on, just as IAG has since the pandemic.
Looking ahead
Consensus analyst forecasts produce a median one-year target of 453p, a modest 12% gain from today. That’s a marked slowdown from recent speeds, so investors may have to lower expectations from here. At least there are dividends now, with a forecast yield of 2.5% in 2025, climbing to 2.75% in 2026.
I still think the shares are worth considering, as ever with a long-term view. If we get a wider stock market dip, they’ll be high on my shopping list. I think IAG still has wings.
