The International Airlines Group (LSE: IAG) share price has been edging closer to £5 for some time now. As I write, shares in the British Airways owner sit at around £4.40, leaving that psychological milestone still some way off.
It’s a level that matters. Round numbers have a habit of acting as magnets for investor attention, and £5 would represent a meaningful marker for a stock that spent years in the doldrums following the pandemic.
It’s also worth noting that the company’s shares were in a similar position eight years ago — when adjusted. The impending Brexit worries, pandemic, and then Russia’s invasion of Ukraine, piled up to push its shares lower.
Reasons for optimism
There’s plenty to like about the prospects for IAG (as it’s best known) right now though. The group’s been quietly rebuilding its financial foundations, with debt falling and free cash flow improving.
Premium cabin demand shows no real signs of cooling, with business travellers returning in force and luxury leisure travel holding firm. Meanwhile, IAG’s Iberia and Vueling operations have been firing on all cylinders, picking up the slack wherever BA faces capacity constraints.
The group posted an operating profit of €4.44bn in 2024 — a 27% jump on the prior year — on revenues of €32.1bn, up 9%. Importantly, free cash flow hit €3.56bn, and the group used that money to slash net debt by €1.73bn, bringing its net debt-to-EBITDA ratio down to just 1.1 times.
That’s a dramatic improvement from 3.1 times back in 2022, and tells us that the business has genuinely put its pandemic balance sheet behind it.
Then there’s share price momentum. Momentum’s actually a really good indicator of forward performance, especially when valuation data suggests the stock could go higher.
Cyclical industry and low valuations
IAG shares were trading around £6.08 eight years ago today. Of course, there’s an adjustment issue. IAG did a massive €2.74bn rights issue in 2020 to survive the pandemic, and when companies raise equity that way — issuing new shares at a steep discount — historical share prices get retroactively adjusted downward to account for the dilution.
On an adjusted basis, it was trading pretty close to today’s share price. And the forward valuation multiple 6.3 times is below the current 6.8 multiple.
Eight years ago however, the balance sheet was pretty much pristine. If we adjust IAG’s current price-to-earnings multiple for net debt, it’s trading closer to 8.5 times forward earnings.
It’s also important to recognise that air travel has traditionally been a cyclical industry. This typically limits how expensive a stock becomes.
Now, there’s definitely some evidence that travel demand is less cyclical post-pandemic. People appear to have structurally reprioritised spending towards experiences over things, and holidays and flights sit near the top of the list of things they’re reluctant to give up.
The bottom line
I’ve only taken one data point above, and cherry-picking metrics is a dangerous game. Looking at the fuller picture, IAG’s valuation is arguably fair rather than obviously cheap.
I still think it’s worth considering. It’s a quality company with great margins. However, investors will find better value elsewhere in the sector. A fiver’s very possible, but it may be driven by momentum rather than another re-rating.
