At a P/E multiple of 6, is this FTSE 100 stock a no-brainer buy to consider in April?
Despite climbing 105% in five years, International Consolidated Airlines Group (LSE:IAG) shares trade at a price-to-earnings (P/E) multiple of 9. That’s well below the FTSE 100 average of 17.
It’s also well below the multiple the stock traded at a year ago, which was 21. So is this a huge opportunity, or is something else going on?
Operational leverage
Nearly every business goes through ups and downs, but some more so than others. And airlines are some of the most volatile when it comes to earnings. The biggest costs are fuel, staff, airport fees, and aircraft. And importantly, these are the same whether a plane is 99% full or 60% empty.
That can be great when things are going well. Being able to add more customers with almost no extra cost means almost all the revenue from ticket sales converts to profits. Equally though, earnings can evaporate quickly when demand drops and airlines end up flying fewer passengers at no real reduction in costs. And IAG’s P/E multiple is a reflection of this.
In general, the P/E ratio a stock trades at doesn’t actually tell investors much about how cheap it is. What it does say, is what the market’s expecting from the underlying business.
When a stock trades at a high multiple, it’s a sign investors are anticipating growth. Equally, a low P/E ratio is a good indication that investors think there might be difficult times ahead.
Turbulence ahead?
IAG shares trading at a P/E ratio of 9 means investors think this are about as likely as they’re going to get, at least for now. But it’s worth noting analysts don’t seem to agree.
Earnings per share are forecast to increase from 46p in 2024 to 71p over the next three years. If that happens, the stock’s trading at a P/E multiple of around 4 based on 2028 earnings.
| Year | (Anticipated) EPS | Implied P/E Ratio |
|---|---|---|
| 2024 | 47p | 6.32 |
| 2025 | 53p | 5.6 |
| 2026 | 58p | 5.12 |
| 2027 | 64p | 4.64 |
| 2028 | 71p | 4.18 |
For my part though, I’m on the side of the market. I think there are a couple of reasons why investing based on an expectation of steady profit growth over the next few years is quite risky.
One is the possibility of a recession. The UK is IAG’s largest market and I think the chance of Britain entering an economic downturn in the near future is unusually high right now. Another is the risk of one-off events, such as the recent fire at Heathrow. The financial impact on IAG’s unclear, but it reminds me of the IT outage in 2017 that cost the firm £80m.
To some extent, all businesses face exogenous threats. But the risk is greater for companies with high fixed costs – such as IAG – where the impact on profits is more profound.
April opportunity?
Other things being equal, it’s better to buy shares at a lower earnings multiple than a higher one. But with cyclical businesses like IAG, other things aren’t equal.
Heading into April, a lot has been going right for IAG. But this is when the risks are greatest and investors need to be most wary. I think that’s what a low P/E multiple is – rightly – reflecting.
There are a few FTSE 100 stocks I’m looking to buy this month, but IAG isn’t one of them.
The post At a P/E multiple of 6, is this FTSE 100 stock a no-brainer buy to consider in April? appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- FTSE shares: an opportunity to secure generational wealth?
- What’s going on with IAG shares as Heathrow shuts?
- Down 20% since February despite excellent 2024 results, is IAG’s share price set to soar again?
- Where could IAG shares go in the next 12 months? Here’s what the experts say!
- Prediction: in 1 year, the IAG share price could reach as high as…
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
