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The International Consolidated Airlines Group (LSE: IAG) share price has had a quiet week by its standards, nudging up just 1.7%. After a 92% gain over the past 12 months, it’s due a breather.
Few sectors suffered more than aviation during the pandemic. Fleets were grounded and losses mounted, but fixed costs remained. FTSE 100 member International Consolidated Airlines only survived by borrowing billions.
Even at the start of last year, the shares were still idling on the runway. I looked at its ridiculously low price-to-earnings ratio – just three or four times earnings – and assumed I was missing something. I didn’t buy.
Then came the recovery. Business travel picked up. Transatlantic routes roared back to life. The share price took off. By the year end, it had doubled.
Cash flowing again
Results for 2024, published on 27 February, were impressive. Operating profit before exceptional items climbed 27% to €4.44bn, while revenues rose 9%. Free cash flow hit €3.56bn, even after the company poured €2.82bn into the business. The return on invested capital was a robust 17.3%.
British Airways posted a €2.05bn operating profit, delivering a 14.2% margin. The board’s confidence showed with a €350m share buyback. It plans to return up to another €1bn in excess capital over the next 12 months.
With net debt trimmed to €7.5bn, things were looking up. Then Donald Trump announced his trade tariffs on 2 April. International Consolidated Airlines found itself on the front line of this crisis, too.
I watched the stock plunge, my finger hovering over the Buy button. Trump’s 90-day tariff pause on 9 April caught everyone by surprise, including me.
I jumped in the second the market opened next morning. Annoyingly, by the time my trade completed, the shares had already rebounded 9%. Even so, I’m up 27%. Not a bad start.
Valuation looks appealing
The stock now trades around 333p, giving a price-to-earnings ratio of just over seven. That still looks cheap to me, although the fast money may already have been made. Deutsche Bank recently trimmed its 2025 and 2026 earnings forecasts by 13% and 10%, citing uncertainty over transatlantic traffic. It cut its price target from 400p to 370p.
That still suggests growth of 14% from here, with brokers forecasting a potential yield of 3.25% on top. Of 26 analysts covering the stock, 17 call it a Strong Buy. Only one says Sell.
As an airline, risk is never far away. Fuel is cheap today at $65 a barrel, but if that rises, margins could feel the squeeze. Travel demand is still solid, yet the global economy feels fragile. We still don’t know how trade talks with the EU will turn out, and the uncertainty is likely to squeeze the transatlantic trade.
The company also has to keep investing heavily, while juggling debt and dividend commitments.
Still, for investors happy to take a long-term view, and who like the idea of picking up FTSE 100 companies at lowly valuations, I think International Consolidated Airlines is one to consider. However, I think the post-tariff bump has now run its course. Growth could slow from here.
