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Choose the stocks with the best performance in the FTSE 100 By 2025 I am almost certainly headed for failure. However, I think investors should consider IAG (LSE:IAG). The stock offers momentum, favorable trends, an attractive valuation and impressive profitability.
Let's take a closer look.
The best of the package
IAG, owner of British Airways and Iberia, operates airlines in intercontinental and interregional economy markets. It is one of the largest in Europe by fleet size. The company has seen a strong recovery across most of the business since the dark days of the pandemic. In fact, the civil aviation sector is expected to remain very strong in the coming years.
According to analysts, IAG is likely to remain best in class during this period. Its EBIT (earnings before interest and taxes) margin is expected to reach 15% by 2027, up from 10% in 2023. In fact, the Iberia brand is already achieving an EBIT margin of 14%. The group is expected to deliver the best return on invested capital and free cash flow generation in the medium term.
The company is also expected to reap the benefits of a transforming fleet, delivering more operational efficiencies, especially through fuel efficiency. This is important because fuel costs represent the largest margin differential. As such, falling fuel prices combined with an increasingly fuel-efficient fleet represent catalysts for earnings growth.
The numbers add up
More experienced investors will rely to some extent on quantitative metrics. Quantitative models include the obvious valuation data, but also things like profitability metrics, growth expectations, and whether earnings expectations have recently been revised up or down. Many investors also like stocks with strong share price momentum, as this often reflects investor sentiment towards the stock.
So what are these numbers?
- For starters, the stock trades at around seven times forward earnings. This appears to be a discount of approximately 15% to 20% for the global airline industry.
- Current forecasts suggest that earnings will grow around 12% over the next three years, and that the forward price-to-earnings (P/E) ratio will fall from 7x to 5.8x by 2026.
- The company's gross profit margin last year, of about 27%, is almost the best in the industry.
- Over the last month, IAG has received the highest proportion of positive earnings revisions from analysts. This tells us that analysts are increasingly optimistic about the company.
- In June 2024, IAG reported that debt of £16.12bn is not a concern given £13.2bn in cash and facilities.
Something to worry about?
No investment is risk-free. With IAG's share price rising over the last 12 months, it is entirely possible that we will see some profit taking as we enter 2025. If shareholders sell their shares to lock in their profits, the share price could fall.
Additionally, Russia's war in Ukraine and the conflict in the Middle East have highlighted how vulnerable the sector is to price fluctuations. With fuel accounting for around 25% of operating costs, rising prices have a considerable impact on profits.
The final result
IAG has all the makings of a winner as we move towards 2025, and investors may want to put it on their watch list. It is well represented in my portfolio and I am tempted to buy more. The problem is that I have already invested a lot in airline stocks.
