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International Consolidated Airlines’ (LSE: IAG) share price has dropped 34% from its 7 February one-year high of £3.68.
This sort of a fall could flag a buying opportunity for those whose portfolio the stock suits. But it depends on two key factors in my experience as a former senior investment bank trader and longtime private investor.
The first is how strong the core business looks, including its earnings growth projections. The second is how the stock’s valuation appears compared to its price – and the two are not the same.
The reasons for the price fall
Before the additional 10% share price loss caused by the US’s new tariffs announcements, IAG’s share price was down 24%.
This was caused by a statement from the Competition and Markets Authority regarding greater sharing of operational slots by five airlines with their competitors.
More specifically, the five carriers – including IAG’s British Airways — agreed to give competitors take-off and landing slots at London airports on routes to and from Boston, Miami, and Chicago.
This feeds into a broad risk that increased competition in the airline sector may reduce IAG’s earnings over time.
How strong is the core business?
That said, IAG’s full-year 2024 results showed a strong business, with revenue up 9% year on year to €32.1bn (£27.02bn). Operating profit increased 22.1% (to €4.283bn) over the period, while profit after tax rose 2.9% (to €2.732bn).
The fourth quarter looked especially robust as operating profit soared 91.4% quarter on quarter. This came from an 11.4% rise in revenue over the period.
On the other side of the balance sheet, the firm reduced its net debt by 17% to €7.517bn.
One benefit for shareholders was the announcement of a €1bn share buyback to be completed this year. These tend to support share price gains.
As it now stands, analysts project the company’s earnings will increase 6.6% a year to end-2027. And it is profit that ultimately powers a firm’s share price and dividends in the future.
How does the stock’s valuation look now?
On the first part of my standard share price assessment – key valuations’ comparisons with competitors – IAG’s results are mixed.
Its 4.9 price-to-earnings ratio is undervalued against the 8 average of its competitors. These consist of Jet 2 at 5.1, easyJet at 7.2, Wizz Air at 9.8, and Singapore Airlines at 9.9.
Its 0.4 price-to-sales ratio is slightly undervalued compared to its peers’ 0.5 average.
However, its 2.2 price-to-book ratio is overvalued against their average of 2.
That said, my acid test of value – a discounted cash flow analysis – shows the stock is 66% undervalued at £2.43. So, the fair value is technically £7.15. This rates as a huge bargain to me.
Nevertheless, it is not unmissable for me – and I will not buy it — for two key reasons. First, I am focused on high-yield stocks, which this is not (yielding just 3.1%). And second, the airline sector is too risky for me at my later stage of the investment cycle, aged over 50 as I am.
