The IAG (LSE:IAG) share price performed relatively well in 2023. However, the current price is nowhere near the 457p the stock traded for back in early 2020.
Now trading above £1.50, the next milestones are £2.00 and £2.50. So is there any hope the stock may reach the latter and, if so, when?
Target price
It’s not unusual for a company to trade slightly below its target price. However, IAG has one of the biggest discounts versus its average share price target.
At the time of writing, IAG shares are trading for £1.51, while the average share price target is £2.18. In turn, that means IAG is trading at a 41.9% discount versus the target.
Valuation
IAG currently has some of the most attractive near-term valuation metrics on the FTSE 100. The stock trades at 4.34 times TTM (Trailing 12 Month) earnings and 3.93 times forward earnings. This represents a huge discount to the industrials sector — 80.4% (TTM) and 81.5% (Forward).
When we look closer we also see companies such as Ryanair and easyJet we can also see this discount. Ryanair trades at 13 times forward earnings and easyJet 9.11.
However, the difference is that these companies are expected to deliver better growth in the coming years. As we can see from the table below, IAG’s earnings per share (EPS) actually goes into reverse in 2024 before improving again in 2025.
| 2023 | 2024 | 2025 | |
| EPS (¢) | 46 | 37 | 43 |
A major reason for this falling EPS forecast is fuel costs. This represents 25% of total costs and the airline has hedged 65% in Q4 2023, 58% in Q1 2024, 49% in Q2 2024, and 39% in Q3 2024.
And that leaves it open to fluctuations in jet fuel prices as the year goes on. Mercifully, we’re seeing a drop in global oil prices and jet fuel prices, but they’re still high versus long-term averages. Arguably, oil prices would be near 10% lower if we weren’t seeing geopolitical tensions across the Middle East.
Transatlantic advantage
It’s worth noting that although IAG employs a hedging strategy, a common practice among European airlines, its American counterparts don’t.
While this might initially appear to be a competitive advantage, particularly on transatlantic routes, its significance isn’t as substantial as it may appear.
That’s because IAG, the parent company of Iberia and British Airways, operates a joint business with American Airlines and Finnair for transatlantic routes.
Profits are combined at the end of each quarter, so a less profitable American Airlines could drag earnings lower.
Nonetheless, I anticipate IAG will maintain some competitive edge over its peers in North America during the period.
Is it worth it?
Even in 2024 IAG, using the current share price, would be trading at 4.8 times earnings. That’s far cheaper than peers.
However, investors don’t want to target companies that are going backwards, or showing few signs of growing the business.
The stock certainly could be trading higher. And £2.50 wouldn’t make it on near-term metrics. For instance, if IAG shares were trading at £2.50, the P/E ratio would only be 6.5 — that’s still lower than Ryanair and easyJet. So, could it be trading at £2.50, absolutely. But I think we need to see an improving growth outlook before momentum returns.
I’m a little divided, but I already hold the stock. I’m holding for now, but accept the poor momentum and growth trajectory.
