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International Consolidated Airlines Group’s (LSE: IAG) share price is trading around a five-year high. However, this does not mean that no value remains in the stock.
Value is the true worth of a firm’s shares based on the strength of the underlying business’s fundamentals. Price is just what the market will pay for a stock at any given time.
Understanding the difference between the two is the key to making big, sustained long-term profits, in my experience. And this includes several years as a senior investment bank trader and decades as a private investor.
To find out whether this price-to-valuation disparity applies to IAG, as it is known, I ran the key numbers and re-examined the business.
How does the core business look?
The British Airways owner’s H1 2025 results released on 1 August showed revenue rose 8% year on year to €15.906bn (£13.84bn). Meanwhile, profit after tax soared 43.8% to £1.301bn. Net debt fell a whopping 27% to €5.459bn.
Revenue is the total income made by a firm, while profit is what remains after the deduction of expenses. It is profits that ultimately drive any firm’s share price (and dividends) over the long term.
Positive as well was the 2.7% jump in available seat kilometres (ASK). This shows an airline’s carrying capacity to generate revenue. It is derived by multiplying the available seats on any given aircraft by the number of kilometres flown on a given flight.
And the revenue per available seat kilometre – highlighting the average revenue earned for each seat flown one kilometre – was up 2.9%. Essentially this shows how effectively an airline generates revenue from its available seats.
The outlook
A risk to IAG’s profits is the high level of competition in the sector that could squeeze its margins. Another is a renewed surge in the cost of living, which could deter people from taking holidays.
That said, the airline is targeting medium-term operating margins of 12%-15% and return on invested capital (ROIC) of 13%-16%.
ROIC is very similar to return on capital employed (ROCE). The former is net operating income divided by invested capital; the latter is net operating income divided by capital employed.
Three main factors will drive these margin and ROIC targets to 2027, according to IAG. First, boosting British Airways’ margin to 15%, from 14.2% in 2024. Second, increasing Iberia’s operating profit to €1.4bn, from €1.027bn last year and its operating margin up to 15%, from 13.8% in 2024. And third, growing the ‘IAG Loyalty’ scheme.
Consensus analysts’ forecasts are that IAG’s profits will increase by 4.7% a year to end-2027.
How does the share valuation look?
Despite its rise in price over the year, IAG’s 6.4 price-to-earnings ratio is still undervalued against its competitors. These comprise Wizz Air at 5.9, Jet2 and Singapore Airlines each at 7.4, and easyJet at 8.9.
It is second from bottom of this group at 6.4 compared to their average of 7.4.
A discounted cash flow (DCF) valuation pinpoints where any firm’s stock price should be, based on cash flow forecasts for the underlying business.
And the DCF in IAG’s case shows its shares are 57% undervalued at their current price of £3.73.
Therefore, their fair value is £8.67.
Consequently, I think the stock well worth the consideration of investors whose portfolios it suits.
