The International Consolidated Airlines (LSE:IAG) share price has fallen by 12% over the past three months. Sentiment around the conflict in the Middle East, along with the impact on IAG in terms of costs, has hurt the stock overall. Yet with some signs of stabilisation, I believe the IAG share price could be getting ready to soar again over the next couple of months.
Near-term issues
The biggest issue affecting the stock recently has been concern about fuel prices. The conflict in the Middle East has sharply increased jet fuel costs, prompting investors to worry that airline profit margins could come under pressure this summer.
At the same time, airline stocks are extremely sensitive to economic sentiment. Even if planes remain full, fears around slowing consumer spending or weaker corporate travel can quickly hit valuations.
The summer heat
Yet despite these concerns, the picture could flip to looking very rosy, very fast. Clearly, the immediate catalyst would be a resolution to the tensions in the Middle East. Not only would this lower fuel prices, but it would also make consumers more confident about resuming travel plans to the region. Yet even without this, other factors could still push the stock higher.
For example, demand for travel remains robust across Europe, as shown in the Q1 trading update. The same update also flagged up that “our capital-light Loyalty business grew its revenue by 10.0% and profit increased by 32.6%.” The growth of this division is great because it provides a steadier earnings stream than traditional airline operations alone.
There’s also a strong seasonal angle here. Airlines typically generate a huge portion of annual profits during the summer travel season. If booking momentum remains healthy through May and June, investor sentiment could improve rapidly.
A glaring valuation opportunity
Another reason we might see the stock outperform is that it’s potentially undervalued. Some investors are looking to reallocate capital from tech and AI stocks that have experienced a sharp rise so far this year. In terms of where it looks attractive to redeploy this money, stocks like IAG do look appealing.
It has a price-to-earnings ratio of just 6.23, well below both the FTSE 100 average and my fair value benchmark of 10. I think it’s only a matter of time before people realise that IAG isn’t materially exposed to the problems in the Middle East, and that it could reflect a time to snap up the stock cheaply.
Of course, there are still risks. Aside from the ones mentioned, we can’t rule out labour disputes, air traffic disruption or operational problems during peak season. But based on the host of factors mentioned, I believe it’s only a matter of time before the stock moves higher to reflect a fairer valuation. On that basis, it’s a stock I’m looking to add to my portfolio and think investors could consider doing the same.
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Jon Smith has no positions in the shares mentioned.
