It is true that British Airways-owner International Consolidated Airlines’ (LSE: IAG) share price is up 50% from its 20 October 12-month low of £1.37.
However, it is also true that it is still down 67% from the £6.15 level it was trading just before Covid hit in January 2020.
To me, the risk-reward balance of the stock has now firmly tipped in its favour for four key reasons.
Scrapping the Air Europa takeover
The first of these was the firm’s scrapping (on 1 August) of its proposed takeover of Spanish peer Air Europa.
The deal had fallen foul of the European Union’s antitrust regulators, as IAG already owns two other Spanish airlines – Iberia and Vueling. Aside from these and British Airways, it also owns a further two airlines in Europe – Aer Lingus and LEVEL.
So, IAG had been facing the prospect of huge fines and/or the costly amendment or cancellation of the deal anyway.
Removing these risks is a massive boost to the attractiveness of the stock, in my view.
Robust growth outlook
The second reason is its strong growth prospects. Its H1 2024 results saw revenue jump 8.4% over the same period last year, to €14.274bn. Operating profit increased 3.9%, to €1.309bn. And at the same time, net debt was reduced by 31%, to €6.417bn.
IAG announced its medium-term strategy is to achieve operating margins of 12%-15% and return on invested capital of 13%-16%. It forecasts capacity growth of 4%-5% to the end of 2026.
A risk to these numbers is pressure on profit margins due to the intense competition in the sector.
That said, analysts now forecast earnings growth of 3.9% every year to end-2026. And return on equity is expected to be 29.3% by then.
Reinstatement of a dividend
The third reason for my bullishness on the stock is that it reinstated a dividend for the first time since 2019.
At 3 euro cents a share (2.5p) it is not massive, giving a yield on the current £2.06 stock price of just 1.2%. However, it signals to me that the firm wants to reward shareholders going forward.
Additionally positive are analysts’ estimates that the yield will rise to 4.2% in 2025 and 4.4% in 2026.
Major share undervaluation still in place
The final reason for my positivity on the stock is that it still looks a huge bargain to me.
IAG currently trades on the key price-to-earnings ratio (P/E) of stock valuation at just 4.4. This is bottom of its peer group, which has an average P/E of 7.6.
To ascertain how cheap it is, I ran a discounted cash flow analysis using other analysts’ figures and my own.
It shows the stock to be 70% undervalued at the current price of £2.06. So a fair value for the shares would be £6.87, although it may go lower or higher, given the vagaries of the market.
That said, I believe investors should never buy a stock – however good – that is not right for them at their point in the investment cycle.
Aged over 50 now, I am focused on high-yield shares, which presently IAG is not, so I will not buy it.
However, if I were to buy any more growth stocks, this would be around the top of the list for the four reasons given above.
The post 4 reasons why I think IAG’s share price is set to fly even higher from now appeared first on The Motley Fool UK.
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Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
