Is IAG sharing the next Rolls-Royce?

Shares in the owner of British Airways International Airlines (LSE: IAG), or IAG for short, is enjoying a moment of power right now. In the last 12 months, they are up almost 100%. Is it possible for stocks to be the following Rolls-Royce (ie, ‘multibagger’ investors)? Let’s talk.

An attractive setup

IAG shares seem to have a lot going for them today.

First, the company has momentum right now. In the third quarter of 2024, revenue increased 7.9% year-on-year while operating profit jumped 15.4%. Following this performance, the company announced a €350m share buyback. “Demand remains strong for all our aircraft and we expect a good final quarter of 2024 financially,” said CEO Luis Gallego.

Second, this year’s forecasts look healthy. Currently, City analysts expect revenue to rise 4% and earnings per share (EPS) to rise around 10%. Meanwhile, the international aviation organization IATA is predicting record passenger numbers in the sector this year. Airlines are expected to generate $36.6bn in net profit by 2025 – up $5bn from the 2024 forecast.

The balance also looks attractive. With the consensus EPS forecast for 2025 sitting at 59.5 euro cents, the price-to-earnings ratio – or P/E – ratio here is only six. That’s lower than most other airline operators’ ratings.

Finally, there has been a lot of dealer activity lately. Last month, Jeffries raised its target price to 350p from 270p, while Peel Hunt raised its price target to 400p from 270p. Deutsche Bank and recently upgraded the stock to a Buy rating from Hold and raised its price target to 400p from 215p.

Could it echo the Rolls-Royce approach?

As for whether stocks can do like Rolls-Royce (up 680% in just over two years), I’m not sure.

You see, with airlines, something always goes wrong sooner or later. And I expect this to happen here at some point in the not too distant future.

It may be related to geopolitical issues. If conflict escalates in the Middle East, this may lead to route cancellations.

Or, it may be related to oil prices. Oil is at very low levels right now but it is unpredictable and may not go up again. If it were to rise to $100 per barrel, IAG’s share price could fall as investors worry about fuel prices.

Supply chain/engine challenges are another issue to consider. Recently, airlines around the world have seen their growth hampered by problems in the Boeing again Airbus. Meanwhile, IAG has had to cut long-haul flights due to delays in the delivery of engines and parts from Rolls-Royce.

Best stocks to buy?

Therefore, I don’t think IAG shares will generate huge returns in the coming years. I believe there may be further gains on the horizon in the near term but I don’t expect the shares to double or triple in the coming years.

I also think there are better stocks for long-term investors to consider buying. Airline stocks can be a good ‘trade’ at times, but history shows that they are often a bad long-term investment because too much can go wrong.