4 reasons why I think IAG’s share price will rise even higher

It is true that the owner of British Airways International airlines consolidatedThe company’s share price (LSE:IAG) is up 50% from its 12-month low of £1.37 on October 20.

However, it is also true that the rate is still 67% down from the £6.15 level that prevailed just before Covid hit in January 2020.

In my opinion, the risk/reward ratio for the stock has tilted strongly in its favor for four main reasons.

Air Europa takeover canceled

The first of these was the company’s withdrawal (August 1) from the planned takeover of the Spanish airline Air Europa.

The deal fell victim to European Union antitrust regulators because IAG already owns two other Spanish airlines, Iberia and Vueling. In addition to them and British Airways, it also owns two other airlines in Europe, Aer Lingus and LEVEL.

So IAG still faced the prospect of huge fines and/or a costly contract amendment or cancellation.

In my opinion, eliminating these risks would significantly increase the attractiveness of stocks.

Solid growth prospects

The second reason is the strong growth prospects. The results for H1 2024 showed an 8.4% increase in revenue compared to the same period last year, to EUR 14.274 billion. Operating profit increased by 3.9%, to EUR 1.309 billion. At the same time, net debt decreased by 31%, to EUR 6.417 billion.

IAG announced that its medium-term strategy is to achieve an operating margin of 12-15% and a return on invested capital of 13-16%. Capacity growth is forecast at 4-5% by the end of 2026.

A threat to these numbers is the pressure on profit margins caused by intense competition in the sector.

Despite this, analysts are currently forecasting earnings to grow by 3.9% annually until the end of 2026. Return on equity is then expected to be 29.3%.

Reinstatement of dividend

The third reason I am optimistic about the company’s shares is the fact that they have reinstated dividend payments for the first time since 2019.

At 3 euro cents (2.5p) a share, that’s not a huge amount, giving a yield of just 1.2% on the current share price of £2.06. But to me it’s a sign that the company wants to reward shareholders in the future.

Additionally, analysts’ estimates of profitability increasing to 4.2% in 2025 and 4.4% in 2026 are positive.

Stocks are still seriously undervalued

The final reason I’m bullish on stocks is that they still seem like a huge opportunity to me.

IAG shares are currently trading at just 4.4, which is the lowest among its peers, whose average P/E is 7.6.

To see just how cheap this is, I ran a discounted cash flow analysis using data from other analysts and my own.

It shows the shares are undervalued by 70% at their current price of £2.06. So a fair value for the shares would be £6.87, although that could be lower or higher given the vagaries of the market.

That said, I believe investors should never buy a stock – no matter how good – that is not right for them at a given point in the investment cycle.

Now in my 50s, I focus on high yielding stocks, and IAG is not one at the moment, so I won’t buy it.

However, if I were to buy any more growth stocks, these would be at the top of my list for the four reasons stated above.