International Consolidated Airlines Group (LSE: IAG) looks a clear undervaluation opportunity to me right now.
The shares are still priced as if the group, known as IAG, were a fragile post‑pandemic recovery play rather than a structurally improved, cash-generative operator.
For investors willing to look past this lingering discount, I believe the pricing still understates the group’s earnings power.
So, what could the shares really be worth?
What are the key earnings drivers?
The engine for long-term rises in any company’s share price is earnings (‘profits’) growth.
A key risk to IAG is its margins being squeezed by aggressive low-cost short-haul carriers and increasing long-haul competition. Nevertheless, the consensus forecast of analysts is that its earnings will grow by an average 5.2% a year to end-2028.
This steady earnings trajectory is underpinned by several structural drivers. IAG continues to benefit from resilient long-haul demand — described as “strong” across its network in its nine-month 2025 results.
Operational streamlining, including fleet modernisation, helped to deliver a rise in operating margin to 22% in the nine months. More of this is to come, with further fleet upgrades this year and next. Additionally, its strengthened balance sheet — with net leverage of just 0.8 times — and recovering cash flows allow for further investment in higher‑yield routes.
How did the latest results shape up?
In the nine-month results, revenue rose 4.9% year on year to €25.23bn (£21.96bn), supported by resilient long-haul demand across the network. Operating profit grew 18% to €3.93bn, highlighting the benefits of fleet modernisation and operational streamlining.
Profit before tax jumped 22% to €3.62bn, while adjusted earnings per share climbed 27% to 55.5 euro cents. These numbers underline improving profitability and reinforce the structural drivers behind the consensus earnings outlook, in my view.
IAG reiterated its medium‑term ambition, defined as the next 3-5 years, for a 12%-15% operating margin (against 13.8% in 2024).
How much are the shares really worth?
The discounted cash flow (DCF) model is the optimal way to ascertain a share’s true worth, in my experience as a former senior investment bank trader.
It estimates a stock’s ‘fair value’ by projecting the company’s future cash flows that reflect consensus earnings growth forecasts. It then ‘discounts’ them back to today using a rate that reflects the risk of owning the shares. As such, it produces a clean, standalone valuation, unaffected by over- or undervaluation across a business sector.
Some analysts’ DCF modelling is more bearish than mine, and some more bullish, depending on the inputs used. However, based on my DCF assumptions — including a 10.1% discount rate — IAG is 39% undervalued at its current £4.13 price.
Therefore, its fair value could secretly be close to £6.77 a share.
And because asset prices typically trade towards their fair value over time, this suggests a potentially terrific buying opportunity to consider today if this modelling proves accurate.
My investment view
IAG’s stronger balance sheet, improving margins, and steady earnings outlook make the valuation gap hard to ignore, in my view.
For me, the airlines sector carries more risk than I want at this stage of my investment cycle. I have my eye on several high dividend-yielding stocks, also with sizeable valuation gaps.
However, less risk-averse investors may find the current discount an appealing opportunity to explore.
