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He Interest group According to City and Wall Street analysts, the (LSE:IAG) share price was severely undervalued. When I covered the stock in early August, the airline operator was trading at a 42.8% discount to the average share price target.
So why has the stock started moving towards its target price? Will it continue to rise from here?
Let's explore.
New catalysts
There are several reasons why IAG's share price is rising.
First, the decision, announced on August 1, to abandon the proposed acquisition of Air Europa, which removes significant regulatory risks, in particular from European Union antitrust regulators, and alleviates concerns about potential fines and operational disruptions.
A day later, IAG announced strong financial results for the first half of 2024, with revenues up 8.4% year-on-year to €14.7 billion and operating profit rising to €1.3 billion.
The company, which owns brands such as British Airways and Iberia, also achieved a substantial reduction in net debt, by 31% to 6.4 billion euros, further strengthening its balance sheet.
New dividend, solid outlook
To give shareholders a boost, IAG also announced a return to dividend payments with an interim dividend of €0.03. While this is positive for investors, it is also a sign of management's confidence in the company's financial health.
Looking ahead, management reinforced this confident outlook with a growth strategy that includes a 4%-5% capacity increase through 2026 and an ambitious operating margin target of 12%-15%.
Analysts project earnings growth of 4.8% annually through 2026, supported by strong demand in key markets such as North America and Latin America.
This is not a record pace of growth, but airlines are cyclical. We have recently had two years of incredibly strong fare growth, which is unsustainable in the long term.
And to contextualize, Ryanair announced a 46% drop in first-quarter profit in July, noting that summer rates would be materially lower.
Analysts' forecasts for IAG therefore appear to be quite positive.
The final result on IAG
If there is a slowdown in demand for air travel, IAG could be better positioned than its low-cost peers, simply because it has a more varied offering, tailored to business travel and offers more seating options.
That's something I really like about IAG.
I also like that it is less dependent on Boeing than Ryanair and most US-listed airlines. Boeing's quality and delivery problems have resulted in lower capacity across the industry.
So is there anything worth worrying about? Well, debt is a cause for concern. Net debt stands at around €6.4 billion, and that's about half of the market capitalisation.
Currently, servicing that debt does not seem problematic, but if we were to see some shocks (for example, a significant increase in fuel prices) and earnings were to fall, the debt would become more problematic.
However, I personally remain bullish on IAG. I expect modest earnings growth from a company trading at just 5.3 times forward earnings and an EV/EBITDA ratio of 3.2 times.
It might be a little more expensive than EasyJetbut it has a more varied offering and is much cheaper than Ryanair and other US stocks.
