The International Consolidated Airlines Group (LSE:IAG) has been performing well recently. Over the past two years since we’ve come out of the pandemic, the IAG share price is up 49%. Even though only 8% of this has come from the past year, the current broker forecasts are looking for further gains. Here’s why I think that could become a reality.
Running the numbers
For reference, the current share price is 170p. Broker and bank forecasts usually detail the price level target for the next 12 months. From this, I can get a good indication of what professional analysts are thinking right now.
RBC Capital Markets have a current price target of 230p. This is the same forecast as Bank of America, with Deutsche Bank slightly lower at 215p. The team at J.P. Morgan have a target of 207p.
From this bunching of forecasts, it’s clear to me that the consensus is for a move above 200p to be seen over the next year. Let’s say that we take 200p as a starter. In this case, the stock would need to rally about 18% to reach this. For 230p, it would have to increase by 35%.
As a disclaimer, these are just forecasts. Predictions have been wrong before and they shouldn’t be trusted as fact.
Reasons to support the forecasts
Both of those percentages are large, although based on past performance, they aren’t out of the question. There are a couple of reasons why this target could be realistic.
One is the continued bounce back of financial results. In the latest Q1 results, all the major airlines within the group helped to boost operating profit from €9m in Q1 2023 to €69m last quarter. British Airways added an extra €9m to the pot which I think is really key. The long-haul, more expensive option is clearly coming back in fashion. This bodes well for the future.
Another reason is the outlook going forward. The report commented that it “continue(s) to expect to generate significant free cash flow and maintain a strong balance sheet”. This helps to reduce net debt, which is now just 1.3 times EBITDA. This is a big progress from the pandemic years, when debt spiralled higher. With a stronger balance sheet and lower debt expenses, it should allow the business to increase profitability.
Balancing things out
On the other hand, I do acknowledge that even though we’re out of the pandemic, the cost-of-living crisis is still impacting consumers in the UK and Europe. Inflation is now only starting to hit the target levels. This means that going forward, people might pull back on discretionary spending on overseas flights. This is a risk for the business.
Let’s not forget though that the growth stock was trading above 400p just before the pandemic crash hit us. So even a move back to 230p isn’t exactly pushing above all-time highs! I think that the brokers forecasts are reasonable and so am thinking about adding this stock to my portfolio.
