The International Consolidated Airlines Group (LSE: IAG) share price is flying right now. It’s up 25% in the last three months, and 47% over one year. It’s topping the FTSE 100 leaderboards this morning. Just how high can investors expect it to go from here?
IAG, as it’s called, has got a lift from reports of a US peace deal with Iran. The Middle East conflict hit the airline conglomerate, which owns British Airways, Iberia, Vueling and Aer Lingus, on two fronts. First, by threatening to drive up the cost of jet fuel, and second, by shutting regional flight hubs such as Dubai. Unsurprisingly, it’s also a key beneficiary as hopes grow that hostilities will cease.
Why is this FTSE 100 stock leading the pack?
We’ve seen this pattern before. As Covid lockdowns grounded fleets, IAG was hit harder than any other FTSE 100 stock (aside from Rolls-Royce, which makes airline engines). The Ukraine war didn’t help, driving up oil prices. In both cases, the shares plunged on the initial panic, then recovered as the situation improves.
Anybody buying IAG today must accept it’s likely to be on the front line of the next bout of volatility too, wherever that comes from. It could be war, recession, a natural disaster, climate change, whatever. The board can’t just cut back on costs to weather the storm as these tend to be fixed, and high. It just has to sit things out, until events swing back in its favour.
The shares are certainly swinging today. They’re actually up 143% over the last five years. But here’s the most surprising thing: despite that market-beating growth, they remain cheap, with a price-to-earning ratio of just 7.35.
Normally, when a stock has a strong run like that, I’d expect to see a high P/E, but that’s less than half the FTSE 100 average. Why’s it still so cheap?
My theory is that given the risks I’ve listed above, investors want a bit of a valuation cushion, in case of further turbulence. So does that mean the P/E may always look low? Perhaps, so we shouldn’t put too much faith in it.
Will it continue to grow at this speed?
Can IAG investors expect another bumper year? Some 23 analysts offer one-year share price forecasts, and they’re predicting the stock will hit 491p in 12 months. Disappointingly, that’s an increase of just 5.8% from today’s 464p. If they’re correct, it looks like the pace of growth is going to slow. Investors will get income on top, but the forward yield of 1.98% is still relatively low.
I think the shares are still worth considering today. IAG can’t afford to rest on its laurels, it must always be bracing itself for the next challenge. That injects discipline. And despite my reservations about that P/E, it still looks good value.
But it will remain vulnerable to Middle East and oil price uncertainty, and future growth may not be quite as spectacular. This is a stock to buy on the dips rather than the spikes.
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Harvey Jones owns shares in International Consolidated Airlines Group and Rolls-Royce Holdings.
