The FTSE 100’s top performer in 2024 still looks 30% undervalued to me!

Shares in International Consolidated Airlines (LSE:IAG) soared 95% in 2024, making it the best performer on the FTSE 100. Interestingly, in second place was Rolls-Royce Holdings (up 90%), whose engines are used by many of the airline group’s planes.

It therefore looks as though the airline industry is enjoying a post-pandemic resurgence.

Flying high

Indeed, the latest report from the International Air Transport Association is forecasting industry revenues to pass $1trn for the first time, in 2025. And as a result of rising passenger numbers and increased cargo traffic — coupled with lower oil prices — it’s predicting a record-breaking global net profit of $36.6bn.

It’s a similar story for International Consolidated Airlines.

Analysts are expecting a 2024 operating result (before exceptional items) of €3.7bn. If achieved, this’d be 13.7% higher than in 2019, the last full year before Covid arrived.

And in my opinion, despite rising 47% since the start of October 2024, the shares look to be attractively priced.

Number-crunchers are forecasting earnings per share (EPS) of 53 euro cents (44p at current exchange rates), for 2024. The stock’s therefore currently (3 January) trading on a multiple of 6.9.

Looking ahead to 2025, this drops to 6.3.

Encouragingly, the company’s trading update for the nine months ended 30 September 2024 contained plenty of good news. Revenue, operating profit and EPS were all higher than for the same period in 2023.

And the outlook’s promising. The company reported: “Demand remains strong … and we expect a good final quarter of 2024 financially.”

Back down to earth

But despite these positives, an investment by me would carry many risks. That’s because, with the possible exception of mining, I can’t think of a more difficult industry in which to operate.

As you’d expect from a listed company, the directors have given plenty of thought to the potential threats that the group faces. And they’ve identified 57 significant strategic, operational, financial, and regulatory risks.

These cover everything from increased competition and a lack of access to finance, through to a possible cyber attack and prolonged industrial action by staff.

Looking at the risks, the most relevant currently appears to be potential problems with the supply chain. Issues with Rolls-Royce’s Trent 1000 engine has caused British Airways to cancel a number of flights. If these problems persist, I doubt IAG or Rolls-Royce will be the FTSE 100’s star performers in 2025.

Also, with 28.3% of operating expenditure being attributable to fuel and emissions costs, any major increase in the oil price could damage the bottom line. Unfortunately, with so many global conflicts, this cannot be ruled out.

What should I do?

When a company’s share price has been on an extended bull run, I often think I’ve missed the boat. But due to its attractive valuation, I still think there’s plenty of scope for this share’s rally to continue.

The average price-to-earnings ratio of 73 listed airlines is 8.88. Apply this to International Consolidated Airline’s 2024 earnings and it could be argued that the shares are 30% undervalued.

And in my opinion, despite the numerous potential risks, the airline’s directors have demonstrated that they’re capable of meeting them head on. After all, they managed to navigate the business through the unprecedented challenge of Covid.

I’m therefore going to keep the stock on my watchlist for when I next have some spare cash.

The post The FTSE 100’s top performer in 2024 still looks 30% undervalued to me! appeared first on The Motley Fool UK.

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James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.