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He Interest group The (LSE:IAG) share price has underperformed in recent years, but it is potentially the best-rated stock on the market. FTSE 100 Index by City and Wall Street analysts.
The British Airways owner currently has six buy, four outperform and five hold ratings. The average share price target of 230p is a staggering 42.8% above the current share price.
And the airline's first-half results, released on August 2, have provided some momentum, bringing the stock slightly closer to its target price.
Surpassing results
IAG has posted impressive results for the first half of 2024, with sales up 8.4% to €14.7 billion and pre-tax profit of €905 million. Operating profit remained solid at €1.24 billion, slightly above expectations.
The airline announced a return to dividends with an interim payment of 3¢, reflecting confidence in the company's recovery from the pandemic. Free cash flow, vital for dividends, rose to €3.2 billion and liquidity improved to €9.7 billion.
However, IAG withdrew its bid for Air Europa, citing regulatory concerns. CEO Luis Gallego highlighted strong demand in key markets, which positions IAG well for continued success in the travel sector.
The market is clearly impressed. The stock rose more than 3% in early trading, making it one of the only stocks in the green on European indices on Friday (August 2).
If not for the broader market decline, shares could potentially rise 6% to 10%.
Why should I be optimistic?
The airline group is benefiting from strong post-Covid travel demand, particularly in key markets such as the North Atlantic, Latin America and Central Europe.
Analysts have noted that capacity growth is supportive of prices in both the short and medium term, with strong tariff data in the North Atlantic and other regions.
Falling interest rates could also boost discretionary spending, which would further support travel demand. In addition, IAG has been improving its seat capacity, which is now close to pre-pandemic levels, improving its ability to meet rising demand.
However, risks remain: the airline industry is highly cyclical and sensitive to economic crises, inflation and geopolitical tensions.
In addition, regulatory hurdles, such as those that led IAG to withdraw its bid for Air Europa, could pose challenges.
Despite these risks, IAG's attractive valuation and clear path to improved earnings make it a promising investment.
The stock is trading at just 4.2 times forward earnings for 2024. That figure falls to 3.8 times in 2025 and 3.7 times in 2026.
This is phenomenally cheap compared to the index as a whole, but also compared to its US-listed peers, including Ryanair.
The bottom line
IAG's share price has risen towards its target but remains significantly undervalued, analysts say.
It is very cheap compared to its US-listed peers and the business is performing well, with expectations of medium-term growth.
I have been seriously considering buying more shares of this company for my portfolio. I certainly don't think it's too late.
