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The IAG (LSE: IAG) share price has been flying in recent years, as it puts pandemic turbulence ever further behind it. Rising jet fuel costs after Russia’s invasion of Ukraine delayed the post-Covid recovery, but the momentum’s built steadily since.
Shares in International Consolidated Airlines Group, to use its full name, are up 85% in the last 12 months and 260% over three years. Normally, after that kind of run, I’d expect the stock to look expensive. Yet it still has one of the lowest valuations in the FTSE 100, with a price-to-earnings (P/E) ratio of just 7.9. That’s barely half the index average of 15.
That discount shows investors remain cautious. The pandemic reminded everyone that airlines carry high fixed costs and are exposed to shocks beyond their control. Fuel costs, extreme weather, geopolitical conflict and natural disasters can hit performance without warning. Recessions and tariffs are other concerns, since they threaten both tourist and business demand. The lower P/E highlights those long-standing risks.
Profits climbing
Half-year numbers on 1 August showed revenue up 8% to €15.9bn, while operating profit before exceptional items jumped 43.5% to €1.88bn. It wasn’t long ago that debt threatened to overwhelm the company, but now it’s been cut to €5.46bn, while the market-cap’s up to £17.7bn.
Margins improved from 8.9% to 11.8%, thanks to tighter cost control and its transformation programme. Loyal shareholders are reaping the rewards, with €1.5bn in dividends and share buybacks this year.
Yet the shares have idled lately. One reason is that the company didn’t raise guidance in August, as hoped. Tariffs are a concern, as is the slowing US economy.
Forecasts and projections
Competition’s another risk. Airlines operate in a crowded market where ticket pricing pressure is intense. Even so, analysts reckon IAG’s earnings will grow by 4.7% a year through to 2027. Return on equity is forecast to hit 26.3% by then.
The US economy looks to be slowing, which could dent transatlantic travel. On the other hand, weaker growth may accelerate US Federal Reserve interest rate cuts, which could support shares with American exposure.
So what do the experts say? Consensus forecasts suggest IAG shares could hit 438.46p over the next 12 months, a rise of 14.3% from today’s 383.6p.
Investors can look forward to some dividends too, as the board revives shareholder payouts. The forecast yield for 2025 is 2.58%, which could lift the total return to 16.88%. That would turn a £10,000 investment into £11,688. It’s far from guaranteed, but it’s still a tempting figure. However, investors should also accept that growth is likely to be slower than it has been lately, a period when IAG’s been playing catch-up.
Long-term perspective
Airlines are volatile by nature, so investors should expect more turbulence along the way. Anyone who wants to invest in cyclical sectors like this one needs to accept that. Yet I think IAG remains worth considering today, particularly on such a low valuation.
Those nervous about current market conditions might prefer to wait for a dip before considering a purchase. We may not get one though. As always, the key is to take a long-term approach and ride out the short-term ups and downs.
