International Consolidated Airlines’ (LSE: IAG) share price is down 14% from its 7 February 12-month traded high of £3.68.
This is despite the 9 May release of Q1 2025 results showing a 191% year-on-year rise in operating profit to €191m (£161m). It was also way ahead of consensus analysts’ forecasts of €158m for the period.
This came on the back of a 9.6% rise in total revenue to €7.044bn and an 18% drop in net debt to €6.129bn. Its operating margin more than doubled to 2.8% from 1.1%.
The figures showed continued improvement over the already strong full-year 2024 results released on 28 February. Revenue for the year rose 9% to €32.1bn, while operating profit climbed 22.1% to €4.283bn. Net debt had also dropped 17% over the year to €7.517bn.
Looking ahead
One risk to its profits is that fuel costs could rise significantly for an extended period. Another is that major geopolitical events, such as further conflicts, could affect travel to key destinations.
That said, consensus analysts’ forecasts are that IAG’s earnings will increase by 5.2% a year to the end of 2027. And it is growth here that drives a firm’s share price over time.
IAG’s strategy to generate greater earnings remains focused on the North Atlantic, Latin America and intra-Europe routes.
Its North American revenue rose 13% in Q1 through the addition of new routes. In Latin America, its capacity increased 7.1% from more flights to core destinations. And its intra-European operations saw capacity increase 1.8% through a combination of new routes and more flights.
To boost this growth into the future, IAG has ordered 32 Boeing 787-10 aircraft for British Airways. A further 21 Airbus A330-900neo aircraft have been ordered that may be assigned to IAG’s Aer Lingus, Iberia, and LEVEL operations.
Are the shares a bargain?
IAG’s 5.7 price-to-earnings ratio is bottom of its peer group, which averages 9.4. These companies comprise Jet2 at 7.3, easyJet at 8.7, Singapore Airlines at 10.2, and Wizz Air at 11.6. So, it looks very undervalued on this measure.
Its 0.5 price-to-sales measure is also undervalued against its competitors’ average of 0.6.
But it looks overvalued on its 2.7 price-to-book ratio against its peers’ average of 2.4.
A discounted cash flow analysis shows that IAG shares are 49% undervalued at their current price of £3.17. Therefore, their fair value is £6.22, although stock prices can go down as well as up.
Should I buy the shares?
I am over 50 now, so am in the later part of my investment cycle. This means I am focusing on shares that pay sufficient dividends to generate very high yields.
IAG paid a dividend in 2024 of just 9 euro cents. On the present share price of £3.17, the yield is just 2.5% — nowhere near the 7% I require.
That said, for younger investors or those whose portfolios it otherwise suits, I believe it is worth considering. Its strong position in its field and rising earnings could prompt its share price to soar to its fair value over time I think.
