Analysts think IAG's share price could rise by 38%. What should investors do?

I International Consolidated Airlines (LSE:IAG) share price is down 63% from pre-pandemic levels. But analysts seem to think the stock is below where it should be.

According to TradingView, the stock is currently 38% below the average analyst price target. So as business begins to recover from the effects of Covid-19, is there an opportunity for investors?

Returning

It took a few years, but IAG is somewhere close to where it was before Covid-19. Operating margins and gross debt are both back to where they were before the pandemic.

A key reason why the balance sheet is in good shape is that the company has raised cash by issuing stock. As a result, the number of shares outstanding has increased significantly – and this is not decreasing.

However, earnings per share returned to 2019 levels. And the company announced its intention to pay ordinary dividends from September.

As a result, it trades at a price-to-earnings (P/E) ratio of about 4. So it's easy to see why analysts think the stock looks cheap – it's trading low while the business is growing strongly.

Air Europa

For many investors, the key takeaway from IAG's most recent earnings report was the dividend news. And rightly so – it shows management's confidence in the business going forward.

Something else caught my attention. The company has announced that it is abandoning plans to buy Air Europa – Spain's third largest airline. The company said it will no longer help investors to continue its purchase.

While I'm a big fan of management's careful stewardship of shareholders' funds, I view this as a contradiction. As I see it, this type of agreement is important for airlines like IAG to be a viable investment in the long term. Currently, the industry is very competitive and this is a matter for all stakeholders.

Competition

Most of the costs of operating a plane – fuel and crew – are the same whether the plane has 138 or 150 passengers. That means the cost of adding one passenger is relatively small.

As a result, airlines are encouraged to sell their last few seats on the plane at almost any price. And with customer preferences driven more by cost, it is difficult for competitors to maintain their pricing structure.

The more airlines there are, the more likely someone will offer a deep discount on seats on a particular route. IAG's bid to buy Air Europa could have helped reduce some of the competition in Europe.

Since this is not possible, the price should remain as competitive as ever. And that's why I'll stay away from the stock, despite analysts thinking it may be set for a breakout.

Outlook

In my opinion, the airline industry is in dire need of consolidation – there are too many companies trying to fill their planes with any amount of money. If this happens again, I might look for something else.

I wouldn't be surprised if the analysts are right and IAG's share price will rise. But it's enough to put me out of the basic business, so I won't be buying for the foreseeable future.