Image source: International Airlines Group
I rarely expect to see analysts optimistic about the Consolidated International Airlines (LSE:IAG) share price.
But most of them are tipping the stock as Buy Now. And the average 12-month price target is around 243p.
With the price at 211p as I write, that would be a 15% gain. If we add to this a forecast dividend yield of 2.4%, and if it goes well as they suggest, we could have a good total return.
Even better
Looking around I even see some high-end 450p and up lenses. Do I think the IAG share price will more than double in the next 12 months?
It may seem like there are some heads in the clouds with the planes. But a share price of 450p would lift the price-to-earnings (P/E) ratio, based on forecasts for fiscal 2024, only to 9.7.
I think that might be too optimistic in the current economic climate and considering the cyclical volatility of the airline business. But I can't call it scandalous.
The current share price means a Forward P/E of just 4.6. And that makes me scratch my head and think the stock might be too cheap.
But wait…
These P/E estimates do not include debt and I think we need to adjust for that. In the interim phase, as of June 30, net debt amounted to €6.4 billion, or £5.4 billion at current exchange rates.
International Consolidated has a market capitalization of £10.3bn at the moment. Adjusting for that, we would see an equivalent P/E of seven. And at the high-end stock price target we would be close to 15.
I think the degree to which debt should affect our stock valuation should depend on the nature of the company. Some work better than others with debt financing.
BT GroupFor example, you have been carrying a very high debt for years. But it seems to keep the earnings flowing and the dividends flowing, and the debt service cost is not that high. As long as this continues, shareholders seem quite happy.
External risk
But a company like International Consolidated Airlines faces numerous external risks. By this I mean things that are out of your control. Like fuel costs, pandemics, economic crises, world politics…
And it doesn't have the security backing of providing essential services: taking a flight is much more of a “take it or leave it” decision.
It is because of these risks that I have never bought airline stocks. But then, when I look at that P/E of only 4.6 (and still only about half the FTSE 100 average when adjusted for debt), I can't help but see International Consolidated as a Buy candidate.
Debt falling
Debt is also falling, falling 30% in the 12 months to June. And the board is ready”a target to remain below 1.8x net debt/EBITDA before exceptional items“.
So will I buy? Probably not, because I still don't like airline risk. I just see more Footsie shares looking safer. And pay higher dividends.
