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The IAG (LSE: IAG) share price doubled last year, making it the best performer in the FTSE 100. Investors who wanted to add the stock to their portfolio may have regretfully decided they’d missed their chance as a result.
Now they have a second chance. Shares in International Consolidated Airlines Group, parent company of British Airways, Iberia, Aer Lingus and Vueling, have suddenly dropped 20% in the last month. They’re still up 80% over 12 months though.
Investors who like buying good companies on bad news may be tempted. I think this is a good share. The question is, how bad can the news get?
Is the FTSE 100 dip a buying opportunity?
IAG was obviously hammered by the pandemic that grounded its fleets, and left the company with hefty debts. For years, its price-to-earnings ratio was one of the lowest on the FTSE 100, at around three or four.
Then last year investors decided it had suffered enough. As the US economy boomed they spotted a big opportunity in transatlantic travel, which IAG could tap into via British Airways.
On 28 February, full-year results appeared to justify their confidence. Q4 revenue jumped 11% to €8bn, beating expectations of €7.7bn, while underlying operating profit soared by 91% to €961m. Consensus had suggested just €754m.
With free cash flow jumping 29% to €3.6bn, the board felt confident enough to announce a €1bn share buyback. It clearly felt there was still plenty of value in the stock.
Enter Donald Trump. Markets fear European trade tariffs and the potential US recession will hit transatlantic flight demand. Hence that dip.
Many will be tempted, despite the dangers. IAG’s P/E ratio is back below six, suggesting that the stock is seriously undervalued relative to its earnings potential.
Even if the shares flounder, investors can now look forward to dividends. The trailing yield is 2.74%, but is forecast to hit 3.36% this year and 3.83% in 2026.
Dividends and share buybacks too
Dividends aren’t guaranteed, of course, and shareholder payouts could take a hit if IAG’s profits do. Any slowdown in earnings could also hamper progress on paying down the group’s debt, which still stands at £5.7bn.
Market analysts remain optimistic. The 26 analysts offering one-year share price forecasts have produced a median target of 390p. If accurate, this projection represents an increase of more than 40% from current levels.
However, most of these forecasts were probably made before recent volatility, and may not fully account for Trumpian challenges.
An investor considering IAG shares today has to take a view on how the trade war will pan out. The problem is nobody knows, probably not even Trump. Today’s uncertainty does look like a buying opportunity, but only for investors who plan to hold the shares for at least five years, and ideally longer.
Hopefully by then, today’s eruptions will have calmed. But it’s also worth noting that airlines seem to be on the frontline of every economic, geopolitical and meteorological disturbance. IAG may remain bumpy but to answer my own question, I think we’re seeing deep value today.
This story originally appeared on Motley Fool
