The key point for me as a long-term investor in looking at International Consolidated Airlines Group’s (LSE: IAG) share price is how it performs over 30 years. This period describes the standard long-term investment arc, beginning around 20 years old and ending in early retirement options at about 50.
During that time, a stock will face many risks, as IAG is now facing from the conflict in the Middle East. Its jet fuel costs will rise alongside increases in oil prices. It will be forced to take longer routes on some trips to avoid trouble spots. And several major tourist destinations will effectively be closed.
But ultimately, I believe it has the solid fundamentals to recover and to do so strongly. In essence, it looks to me like the classic short-term-risk/long-term-reward opportunity.
So, how high could it go?
Key growth drivers
Ultimately, it is a company’s ability to generate strong returns from the money invested in it that drives long‑term share price performance.
By end-2028, analysts forecast that IAG’s return on equity will reach a standout 28.7%. That tells me the business is becoming far more efficient, far more profitable per pound of capital, and far better positioned to compound value over time.
This projection looks well-founded to me in the airline’s full-year 2025 results, released on 27 February. Operating profit soared 13.1% to €5bn (£4.34bn), lifting the operating margin to 15.1%, up 1.3 percentage points. This underlined IAG’s ability to convert revenue into bottom‑line earnings despite higher costs.
Free cash flow remained exceptionally strong at €3.1bn, supporting further debt reduction, with net debt falling from €7.5bn to €5.95bn. That pushed net leverage down to just 0.8 times EBITDA, giving IAG one of the strongest balance sheets in the global airline sector. It also creates room for continued investment and shareholder returns.
Capacity increased 2.4% year on year, with Iberia and LEVEL delivering standout performance. Passenger yields rose 1.1%, showing that pricing power remains intact.
Taken together, these trends point to a business with improving efficiency, rising margins and strong cash generation. All of this supports the prospect of sustained value creation over the medium term.
Where ‘should’ the shares be trading?
A discounted cash flow (DCF) analysis identifies where a stock should trade by projecting future cash flows and discounting them back to today. Analysts’ DCF modelling varies — some more bullish than mine, others more bearish — depending on the variables used.
However, based on my bullish DCF assumptions — including a 10% discount rate — IAG shares are 59% undervalued at their current £3.54 price.
This suggests a ‘fair value’ for the shares of around £8.63 — more than double today’s price.
This gap between current price and fair value is crucial for the profits of long-term investors. This is because share prices tend to gravitate to their fair value in the long run.
So the big gap here suggests a potentially terrific buying opportunity to consider today, if those DCF assumptions hold, which is not guaranteed.
My investment view
I focus on high-yield shares, so these — with just a 2.4% dividend return — are not for me.
However, given its strong fundamentals and deep undervaluation, I think it merits serious attention from other long-term investors.
