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The International Consolidated Airlines Group (LSE: IAG) share price is flying, but as ever with the British Airways-owner, it’s likely to remain a turbulent ride.
Friday (12 June) was one of the fun days, with IAG shares climbing 7.07% to lead the FTSE 100 leaderboard. It may seem like an odd winner, given how the SpaceX IPO dominated the headlines. But Elon Musk had nothing to do with the jump. It was down to reports that the US and Iran are close to striking a peace deal that might actually hold for more than 10 minutes.
That gave IAG a lift for two reasons. First, the oil price plunged, to $81 a barrel. That’s well below its peak of $118, which it hit on 29 April. This should cut the price of jet fuel, a major cost for any airline. Second, the war has massively disrupted travel to the Middle East, including key hub Dubai, hitting revenues. IAG will clearly benefit if hostilities cease.
Can it sustain the recovery?
Volatility now comes as standard with this stock, and has done since the pandemic, when IAG was pummelled. Airlines are exposed to every major international stock, whether war, oil spikes, recessions, tariffs, climate change, bad weather, natural disasters, whatever. They have huge fixed costs, but revenues can be highly variable.
Despite that, the overall pattern has been positive. IAG shares are up 119% over five years, and 33% over the last 12 months. Friday obviously helped in that. But here’s the odd thing. The shares still look dirt cheap, with a price-to-earnings ratio of just 6.6. That’s well below the FTSE 100 average of around 16.
That tempts me but I’m also cautious, because I suspect its P/E may always be a little underpowered. I think investors want a valuation cushion, given all the risks I’ve just listed.
IAG operates in a cyclical sector, and in the past I’ve argued for buying its shares when they’re down rather than up. If the Iran deal falls apart next week, as it easily could, then I know which stock is likely to be one of the day’s biggest fallers. So how do investors cope with that?
Is this FTSE 100 stock good value?
First, they should decide whether they want to be exposed to that kind of volatility at all. And second, by taking the long-term view. Management has done a good repair job since the pandemic. It’s halved net debt to €4.2bn and has just launched a second €500m buyback scheme to further reduce its share capital. Full-year profits have been rebuilt.
- 2025 – €5.02bn
- 2024 – €4.44bn
- 2023 – €3.51bn
- 2022 – €1.26bn
- 2021 – (€2.77bn loss)
The board has also been restoring dividends. The yield is forecast to be 2.1% this year, and 2.9% in 2027.
In my view, IAG is one of the more exciting stocks on the FTSE 100, and worth considering with a long-term view. Just don’t get too excited by sudden spikes like Friday’s. If tempted, maybe wait for the next dip. It probably won’t be far away.
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Harvey Jones owns shares in IAG.
This story originally appeared on Motley Fool
