In a recent piece I celebrated easyJet and explained how the demise of its rivals has helped its share price boom in 2019. But of course, the low-cost flier isn’t the only aviation heavyweight to have gained since the turn of January: its FTSE 100 rival International Consolidated Airlines Group (LSE: IAG) has added 1% in the year to date.
Such gains are paltry of course, and certainly compared with the strong run that easyJet has enjoyed of late. But this does suggest that IAG shares remain massively underbought, a point underlined by the British Airways owner’s bargain-basement forward P/E ratio of 6.2 times. And with the outlook for the airline industry improving, this could give rise to a strong upswing in investor buying in 2020.
The favourable trading picture for IAG et al was underlined in a latest report from the International Air Transport Association (IATA) released at the start of December. In it the body says that it expected net profits from the global airline industry to leap to $29.3bn in 2020, up from an anticipated $25.9bn for the outgoing year, and a result that (if realised) would represent an 11th straight year of profit.
IATA commented that “slowing economic growth, trade wars, geopolitical tensions and social unrest, plus continuing uncertainty over Brexit” all contributed to create a tough trading environment for airlines in 2019. It’s a landscape that prompted the association to cut its profits outlook for the year from the $28bn it had anticipated in June.
However, it predicted that “2019 will be the bottom of the current economic cycle and the forecast for 2020 is somewhat brighter,” underpinned by global GDP growth improving to 2.7% from 2.5% in the outgoing period. And pleasingly for IAG, the body expects profit growth to be strongest among European airlines, with expected net profit of $6.2bn for this year expected to improve to $7.9bn next year.
“Economic growth is forecast to pick up and, as a result of substantial cuts in expansion plans, capacity growth is expected to be moderate, helping to improve the supply-demand balance,” IATA said of the European region.
Dividends to keep growing?
Continent-wide expansion plans across the industry may have become more muted of late but IAG, like easyJet, continues to make the sort of moves to help it capitalise on this ripe trading environment. It might have missed out on buying the slots of its fallen rival Thomas Cook at key London airports, but the recent acquisition of Spanish carrier Air Europa significantly boosted its position in Europe and further afield too.
City analysts expect IAG to recover from an expected 10% earnings fall in 2019 by reporting an 8% bottom-line bounce next year. Not an electrifying reading, sure, though it does lead to predictions of more dividend growth and thus a bulky 4.2% yield. Its rising might on the global stage means that the airline operator is a top pick for the next decade, I believe. And at current prices, I think it is too cheap to miss.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.