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He International Group of Consolidated Airlines (LSE:IAG) share price has gained 70% since the start of 2024. And that highlights, once again, a dilemma I continue to face when making investment decisions.
Years ago I decided never to buy an airline. It has to be one of the fiercest competitive businesses out there. One that has little differentiation, competes almost exclusively on price, and is at the mercy of so many external costs that are completely out of its control.
recovery time
But when stock prices were recovering after the 2020 stock market crash, I was convinced airline stocks would come back strong.
Well, maybe the storm is putting a bit of pressure on it, as the IAG share price is still down 50% since the end of 2019. But in recent years it has performed better than the shares I own.
So what happens next?
Analysts have an average 12-month price target of 276p on IAG. That's just 6% ahead of where it is now. But looking at the valuation, I think you could seriously underestimate the potential.
Shouting cheap?
We expect a forward price-to-earnings (P/E) ratio of six this year, and it is expected to fall to 5.5 by 2026. FTSE 100 standards, which almost seems too cheap to pass up.
However, there is net debt of around £7bn on the books. And adjusting it should raise the effective P/E to around nine, falling to 8.5. Maybe it's not a no-brainer after all, but it's still very low compared to the Footsie average (and ignoring other factors).
So what to do? I have to focus on how we make our decisions and I can think of a couple of ways.
Buy what you know
One is to research the companies thoroughly and understand all their ins and outs. And then we will only consider buying when we think we have a good idea of what the next few years will bring.
It is the type of strategy that has led billionaire investor Warren Buffett, through his Berkshire Hathaway investment company, to take the pants off the S&P 500 since it started in 1965.
Is ignorance a blessing?
The opposite approach is to ignore the nature of a business. And just buy when the fundamentals make it look like a good value. That's not as simple as the more practical approach of purchasing an index tracker. But it should still mean a lot less head-scratching.
And a follower of the FTSE 100 would have returned an average return of around 6.8% per year over the last 20 years. So there's a lot to be said for the “ignorance is bliss” angle.
In a nutshell
When I look at the nature of IAG's business, I still think it is fraught with danger. And I really don't think it takes much bad news (whether economic or corporate) for airlines like International Consolidated to fall again.
But for those who can put that aside and simply focus on the valuation metrics, I think it's worth considering.
It can be difficult to break a lifelong habit.
