It is true that British Airways-owner International Consolidated Airlines’ (LSE: IAG) share price is up 50% from its 20 October 12-month low of £1.37.
However, it is also true that it is still down 67% from the £6.15 level it was trading just before Covid hit in January 2020.
To me, the risk-reward balance of the stock has now firmly tipped in its favour for four key reasons.
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Scrapping the Air Europa takeover
The first of these was the firm’s scrapping (on 1 August) of its proposed takeover of Spanish peer Air Europa.
The deal had fallen foul of the European Union’s antitrust regulators, as IAG already owns two other Spanish airlines – Iberia and Vueling. Aside from these and British Airways, it also owns a further two airlines in Europe – Aer Lingus and LEVEL.
So, IAG had been facing the prospect of huge fines and/or the costly amendment or cancellation of the deal anyway.
Removing these risks is a massive boost to the attractiveness of the stock, in my view.
Robust growth outlook
The second reason is its strong growth prospects. Its H1 2024 results saw revenue jump 8.4% over the same period last year, to €14.274bn. Operating profit increased 3.9%, to €1.309bn. And at the same time, net debt was reduced by 31%, to €6.417bn.
IAG announced its medium-term strategy is to achieve operating margins of 12%-15% and return on invested capital of 13%-16%. It forecasts capacity growth of 4%-5% to the end of 2026.
A risk to these numbers is pressure on profit margins due to the intense competition in the sector.
That said, analysts now forecast earnings growth of 3.9% every year to end-2026. And return on equity is expected to be 29.3% by then.
Reinstatement of a dividend
The third reason for my bullishness on the stock is that it reinstated a dividend for the first time since 2019.
At 3 euro cents a share (2.5p) it is not massive, giving a yield on the current £2.06 stock price of just 1.2%. However, it signals to me that the firm wants to reward shareholders going forward.
Additionally positive are analysts’ estimates that the yield will rise to 4.2% in 2025 and 4.4% in 2026.
Major share undervaluation still in place
The final reason for my positivity on the stock is that it still looks a huge bargain to me.
IAG currently trades on the key price-to-earnings ratio (P/E) of stock valuation at just 4.4. This is bottom of its peer group, which has an average P/E of 7.6.
To ascertain how cheap it is, I ran a discounted cash flow analysis using other analysts’ figures and my own.
It shows the stock to be 70% undervalued at the current price of £2.06. So a fair value for the shares would be £6.87, although it may go lower or higher, given the vagaries of the market.
That said, I believe investors should never buy a stock – however good – that is not right for them at their point in the investment cycle.
Aged over 50 now, I am focused on high-yield shares, which presently IAG is not, so I will not buy it.
However, if I were to buy any more growth stocks, this would be around the top of the list for the four reasons given above.
