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I AG (LSE:IAG) share price has been significantly undervalued, according to City and Wall Street analysts. When I covered the stock in early August, the airline was trading at a 42.8% discount to its average share price.
So, why did the stock start moving toward its price target? And will it go up from here?
Let's check.
New catalysts
There are several reasons why IAG's share price is trading higher.
First is the decision, reported on 1 August, to withdraw the proposed takeover of Air Europa. This removes significant regulatory risks, especially for European Union regulators, and reduces concerns about potential fines and operational disruptions.
A day later, IAG reported strong financial results for the first half of 2024, with revenue up 8.4% year-on-year to €14.7bn and operating profit up to €1.3bn.
The company, which owns brands such as British Airways and Iberia, also achieved a significant reduction in total debt, down 31% to €6.4bn, further strengthening the balance sheet.
New dividend, strong opinion
For the benefit of shareholders, IAG also announced the return of the dividend with an interim dividend of €0.03. While that's good for investors, it also reflects management's confidence in the company's financial health.
Looking ahead, management has reinforced this optimistic view with a growth strategy that includes capacity increases of 4%-5% through 2026 and a target operating margin of 12%-15%.
Analysts project revenue growth of 4.8% per year until 2026, supported by strong demand in key markets such as North America and Latin America.
This is not the fastest growth rate in the world, but airlines are going through the cycle. We have recently experienced two years of incredibly strong ridership growth, which in the long run, is unsustainable.
And in context, Ryanair announced a 46% drop in Q1 profits in July, noting that summer fares will drop significantly.
As such, analysts' forecasts for IAG look very strong.
The highest number of IAGs
If there is a slowdown in demand for air travel, IAG may be better placed than its low-cost peers. That is because it has a diverse offering, offering business tourism and offering many accommodation options.
That's my favorite thing about IAG.
I also like that it doesn't depend too much on it Boeing there is Ryanair and many airlines listed in the US. Boeing's quality and delivery problems led to capacity cuts across the industry.
So, should there be anything to worry about? Debt is a concern. Total debt stands at around €6.4bn, and that's almost half of the market.
At the moment, paying that debt doesn't seem to be a problem, but if we were to see some kind of shock – eg, a big jump in fuel prices – and income were to drop, the debt could become a big problem.
Anyway, I personally still work for IAG. I expect modest earnings growth from a company that trades at 5.3 times forward earnings and an EV-to-EBITDA ratio of 3.2 times.
It might be a little pricier than that EasyJetbut it has a diverse offering, and is much cheaper than Ryanair and other US carriers.
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