International Consolidated Airlines Group share price analysis: Is it poised for takeoff?

IAG's post-pandemic recovery: A closer look

International Consolidated Airlines Group (IAG), the parent company of British Airways, Iberia, and other major airlines, has made significant strides in its recovery from the Covid-19 pandemic. Despite the company's share price currently trading at 63% below pre-pandemic levels, many analysts believe the stock is undervalued. In fact, the average price target sits 38% above current levels, suggesting potential upside for investors.

IAG's financial performance has largely recovered from the pandemic's impact. The company's operating margins and debt levels have returned to pre-pandemic norms, while earnings per share (EPS) have bounced back to 2019 levels. This recovery is further underscored by IAG's plans to resume dividend payments starting September 2024, a positive sign for shareholders.

The first half of 2023 saw IAG report an operating profit of €1.3 billion, demonstrating the company's ability to capitalise on the resurgence in air travel. Additionally, IAG has made significant progress in reducing its net debt, which fell from €9.2 billion to €6.4 billion year-over-year (YoY). This improved financial position strengthens the company's ability to weather future challenges and invest in growth opportunities.

Valuation and financial metrics

One of the key factors attracting investor attention to IAG is its current valuation. The company's price-to-earnings (P/E) ratio hovers around 4, which many analysts consider to be relatively cheap compared to historical averages and industry peers. This low P/E ratio suggests that IAG's shares may be undervalued, potentially offering an attractive entry point for investors.

IAG's financial strength is further evidenced by its robust liquidity position of approximately £13.2 billion. This substantial cash reserve provides a buffer against potential economic headwinds and allows the company to pursue strategic initiatives. Moreover, IAG's net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio stands at 1.1 times, well below its target of 1.8 times, indicating a healthy balance sheet.

The company's commitment to delivering shareholder returns is demonstrated by its decision to reinstate dividend payments. This move signals management's confidence in IAG's financial stability and future prospects, which could attract income-focused investors to consider adding IAG to their portfolio.

Strategic developments and industry dynamics

IAG has made several strategic decisions to position itself for long-term success in the competitive airline industry. One notable development was the company's decision to abandon its planned acquisition of Air Europa. After careful consideration, IAG concluded that the deal would not be in the best interests of its shareholders, demonstrating a commitment to disciplined capital allocation.

Instead, IAG is focusing on fleet modernisation as a key strategic initiative. The company plans to replace 140 planes with more fuel-efficient models over the next five years. This investment in newer aircraft is expected to reduce operating costs, improve environmental performance, and enhance the overall passenger experience.

The airline industry continues to face intense competition, which puts pressure on ticket prices and profit margins. However, in the post-pandemic environment, European airlines have achieved record-high passenger revenue yields. IAG has benefited from this trend, with its revenue yield per revenue passenger kilometre (RPK) increasing from €7.86 in 2019 to €9.36 in 2023.

Future outlook and projections

Analysts are optimistic about IAG's future growth prospects. Projections suggest that the company's revenue RPKs could reach 125% of 2019 levels by 2028, indicating substantial growth in passenger traffic. However, it's important to note that revenue yields are expected to gradually decline to pre-Covid levels by 2028 due to increased competition in the industry.

IAG's available seat kilometres (ASK), a measure of capacity, are projected to grow at a compound annual growth rate (CAGR) of 5% through 2028. This expansion in capacity aligns with the expected increase in passenger demand and could support revenue growth in the coming years.

Investors considering IAG should be aware that the company faces ongoing challenges, including economic headwinds, supply chain issues, and increased operational expenses. Additionally, IAG's high exposure to business travel may pressure margins if this segment remains below pre-pandemic levels. Competition from low-cost airlines on profitable short-haul routes also poses a threat to IAG's market share and profitability.

IAG share price – IG client sentiment & broker assessment

IG clients are still firmly bullish on the outlook for IAG’s share price. At present, IG clients are 94% long on the stock, indicating strong optimism around the share price.

IAG shares have an ‘outperform’ rating on the IG platform, while broker ratings are firmly bullish, with 10 ‘buy’ ratings, 3 ‘holds’ and no ‘sell’ ratings.

IAG share price – technical analysis

The IAG share price, up 27% year-to-date, has broken out of its 2023-to-2024 continuation triangle on the weekly chart and from the retest point of its upper triangle line in July and August has seen six consecutive weeks of gains, rising by over 20% since.

IAG weekly candlestick chart

The IAG share price is now trading at levels last seen in June 2021 whilst aiming for the March 2021 peak at 222.10p. Another potential upside target is the June 2020 peak at 239.60p.

Previous resistance at the 187.65p May high, because of inverse polarity, should now act as support, were it to be revisited at all.

IAG daily candlestick chart

The current August-to-September ascent has been contained within a steep and tight uptrend channel, showing consistent underlying buying pressure.

Investment considerations and risk factors

While IAG's recovery and financial position appear promising, potential investors should carefully consider the risks associated with the airline industry. Economic uncertainties, geopolitical tensions, and fluctuations in fuel prices can all impact airline profitability. It's crucial for investors to conduct thorough research and consider their risk tolerance before making investment decisions..

For those interested in gaining exposure to IAG or the broader airline sector, there are several options to consider. Investing in shares directly is one approach, but it's also possible to gain exposure through index funds or exchange-traded funds (ETFs) that focus on the transportation or aviation sectors.

Before making any investment decisions, it's advisable to consult with a financial advisor and consider your overall investment strategy. Additionally, using a demo account to practice trading and familiarise yourself with the markets can be a valuable learning experience for novice investors.

Conclusion: Is IAG ready for takeoff?

IAG has demonstrated a strong recovery from the pandemic, with improving financial metrics and strategic initiatives aimed at future growth. The company's current valuation, coupled with analyst optimism, suggests there may be potential upside for investors willing to navigate the inherent risks of the airline industry.

However, it's important to approach any investment decision with caution and a long-term perspective. The airline industry remains susceptible to external shocks and intense competition, which could impact IAG's performance in the future. Investors should carefully weigh the potential rewards against the risks and consider how an investment in IAG aligns with their overall investment.

As always, diversification is key to managing risk in any investment portfolio. Whether you're considering investing in IAG or exploring other opportunities in the aviation sector, it's essential to conduct thorough research, stay informed about industry trends, and regularly review your investment choices to ensure they continue to align with your financial goals.