This major bank says the IAG share price is too cheap at 6.7x earnings

The IAG (LSE:IAG) share price has outpaced the FTSE 100 in 2024. The British Airways owner is up almost 80% over 12 months, representing a major win for shareholders.

But there are plenty of analysts that say this stock should be trading higher. While IAG shares are now trading in line with the average share price target, analysts have largely remained bullish with seven Buy ratings, four Outperform ratings, and six Hold ratings.

The most recent of these broker ratings comes from the world’s largest commercial bank, JPMorgan. Analysts at the institution believe the airline operator should be trading for £4.13 per share — that’s 47% above the current share price.

JPMorgan’s bull case

JPMorgan analysts said on 4 December that IAG was the “most compelling” overweight stock — a stock that analysts believe is poised to outperform — in the airline sector. The bank highlighted solid pricing and strong free cash flow, which could lead to significant shareholder returns in the medium term.

Additionally, IAG benefits from a favourable demand-supply balance — strong demand and tight supply — and potential fuel cost trends. While 2025 may present mixed conditions for the transport sector overall, European airlines like IAG are expected to see earnings growth, prompting JPMorgan to add it to their Analyst Focus List, which targets ideas for growth, income, value, and short investing strategies.

IAG’s supportive trends

So, let’s take a look at the supportive trends.

Firstly, aviation fuel prices are materially lower than they have been in recent years. They could fall further given the current demand-supply balance, especially if Trump’s energy policies are implemented, which could reduce operating costs for airlines. Moreover, despite recent geopolitical events in Syria, oil hasn’t jumped, indicating downward pressure. Fuel roughly represents 25% of operating costs.

Secondly, also on a geopolitical front, a possible end to the Russian war in Ukraine could open up more airspace, potentially benefitting European airlines that have been avoiding Ukraine and prohibited from Russian airspace. This could make routes like London to Tokyo or Seoul more profitable.

Finally, and potentially most importantly, we can expect to see further interest rate cuts over the next 12 months. This should free up more money for consumers, potentially leading to increased demand for air travel and holiday packages. It could also reduce borrowing costs for airlines, potentially making fleet upgrades — something IAG has typically been very good at — or expansion, more affordable.

The bottom line on IAG

Airlines always remain vulnerable to demand shocks — sudden changes in demand — as the pandemic and Russia’s full-scale invasion of Ukraine highlighted. Likewise, we need to be wary that interest rates might fall slower than expected, and thus have a negative impact on expected demand.

However, I’m willing to look beyond these risks and I’d consider adding to my IAG holding if I didn’t already have sizeable exposure to the airline sector. Key to this is the forward valuation of 6.7 times earnings, and expected modest growth in the coming years. This is compounded by the company’s varied product offering and the supportive trends in the wider sector.

The post This major bank says the IAG share price is too cheap at 6.7x earnings appeared first on The Motley Fool UK.

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JPMorgan Chase is an advertising partner of Motley Fool Money. James Fox has positions in International Consolidated Airlines Group. 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.