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British Airways owner International consolidated airlines‘ (LSE: IAG) The share price has fallen 11% from its 12-month high of £1.87 on 14 May. The price-to-earnings (P/E) ratio of the stock valuation is now just 3.6, compared to the peer group average of 7.2.
This is the last of the group consisting of Wizz Air at 5.1, Jet2 at 7.1, Singapore Airlines at 7.9 and easyJet at 8.7.
To find out how cheap it is, I ran a discounted cash flow analysis using my own numbers and those of other analysts.
It shows that IAG shares are 73% undervalued at their current price of £1.67, so a fair value for the stock would be £6.19.
Interestingly, this is almost exactly the share price at which the stock was trading before the Covid pandemic hit in early 2020. In fact, the valuation suggests that the company’s economic outlook is broadly the same as it was then.
Based on the company’s results last year, I agree.
Back to Black
IAG returned to profit in the first half of 2022 for the first time since 2019. The company reported a profit of €293 million (£251 million) in the second quarter of 2022, compared to a loss of €967 million in the second quarter of 2021.
In 2023, operating profit rose to EUR 3.5 billion and the operating margin doubled to 11.9 percent. By this time, capacity in most core markets had recovered almost to pre-Covid levels.
The results for the first half of 2024, published on August 1, showed an increase in revenue of 8.4% compared to the same period last year – to 14.274 billion euros. Operating profit rose by 3.9% to 1.309 billion euros and net debt fell by 31% to 6.417 billion euros. These figures prompted the company to introduce a dividend for the first time since 2019 – 3 euros per share.
IAG’s medium-term strategy is to achieve operating margins of 12 to 15 percent and a return on capital of 13 to 16 percent, with capacity growth forecast at 4 to 5 percent by the end of 2026.
Analysts expect profits and revenues to increase by 5.8% and 3.7% annually respectively by then. The return on equity is expected to be 29.2% by then.
A major risk to these numbers could be a new pandemic or an expansion of existing conflicts in Europe and/or the Middle East. Since the war in Ukraine, for example, Western airlines have been avoiding the shorter – and less expensive – route via Russian airspace to several Asian destinations.
Right stock, wrong time for me
As I am over 50, I would like to increasingly live off dividend income and further reduce my work commitments.
This means that I focus on high-quality stocks that pay a very high dividend. My current portfolio, which is geared towards this goal, yields an average of over 9%.
IAG has just started paying regular dividends so it doesn’t do me any good in that regard.
However, I would buy the stock if I were only ten years younger.
The company has recovered robustly from the Covid years and, in my opinion, should grow very strongly.
Against this backdrop, shares appear too cheap to ignore, and I believe this undervaluation is unlikely to last.
