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International Consolidated Airlines Group’s (LSE: IAG) share price has dropped 15% from its 7 February one-year traded high of £3.68.
However, it has done so because of short-term factors that may disappear sooner rather than later, in my view.
This would make its bearish-looking share price look like even more of a bargain than I thought it was before.
What’s caused the drop in share price?
The share price began to slide after the 1 February announcement of US tariffs on Mexico and Canada. Markets feared these might be extended to other countries.
When they duly were on 2 April – including on the UK — the share price fell some more. The lucrative North Atlantic routes comprise over 30% of IAG’s (as it’s known for short) available seat kilometres (ASK) in 2024. ASK measures the potential revenue-generating capacity of an airline’s operations.
An indefinite continuation of these tariffs remains a risk for the firm. That said, IAG is working on expanding other routes in Latin America and Europe. Its Q1 2025 results saw a 7.1% year-on-year rise in its Latin America capacity and a 1.8% increase for Europe.
Additionally, I think it unlikely that these tariffs will remain much past Donald Trump’s current presidential term.
The other major factor that pushed its share price down was the recent escalation in the Iran-Israel conflict. This raised jet fuel prices and heightened market fears of key regional holiday destinations being disrupted.
These are certainly risks for IAG. Again,though, I think they are unlikely to continue for years.
That said, IAG’s Q1 results saw operating profit soar 191% to €191m (£161m). Total revenue jumped 9.6% to €7.044bn and net debt fell 18% to €6.129bn. Its operating margin more than doubled to 2.8% from 1.1%.
How undervalued are the shares now?
IAG’s 5.9 price-to-earnings ratio looks very undervalued against its peer group’s 7.6 average. This comprises Wizz Air at 5.6, Singapore Airlines at 7.4, Jet2 at 7.6, and easyJet at 9.8.
It also looks undervalued on its 0.5 price-to-sales ratio against its competitors’ average of 0.6.
I ran a discounted cash flow analysis that shows where any firm’s share price should be, based on cash flow forecasts for the underlying business.
This shows IAG shares are 49% undervalued at their current price of £3.14.
Therefore, their fair value is £6.16.
Will I buy the stock?
I am well over 50 now and focus on shares with a 7%+ dividend yield. These should enable me to keep reducing my working commitments. IAG only pays 2.5%, so it is not for me.
My latter point in the investment cycle also means my appetite to take investment risk has diminished. Basically, the longer the time remaining in someone’s investment cycle, the more time stocks have to recover from any shocks. And as has again been highlighted over the past five years, the airline sector is subject to many risks.
That said, if I were even 10 years younger I would buy IAG shares. It has strong earnings growth potential that should drive its share price and dividends much higher over time.
Consequently, I think it well worth the serious consideration by investors whose portfolios it suits.
