Image source: International Airlines Group
You share International Airlines (LSE:IAG) is up 95% in 2024, making it the best performer FTSE 100. Interestingly, in second place was Company Rolls-Royce Holdings (up to 90%), the engines of which are used by most of the airline’s aircraft.
So it looks like the airline industry is enjoying a post-pandemic resurgence.
Flying high
Indeed, a recent report from the International Air Transport Association predicts that industry revenue will exceed $1trn for the first time, by 2025. And because of rising passenger numbers and increased freight traffic – coupled with low oil prices – it predicts a record. – breaking the global turnover of 36.6bn.
Same story for International Consolidated Airlines.
Analysts expect a 2024 operating result (before exceptional items) of €3.7bn. If achieved, this will be 13.7% higher than in 2019, the last full year before the arrival of Covid.
And in my opinion, despite a 47% rise since early October 2024, the shares look attractively priced.
Number-crunchers are forecasting earnings per share (EPS) of 53 cents (44p at current exchange rates), in 2024. So the stock is currently (3 January) trading at a multiple of 6.9.
Looking ahead to 2025, this drops to 6.3.
It is encouraging that the company’s trading update for the nine months ended 30 September 2024 contains a lot of good news. Revenue, operating profit and EPS were all higher than the same period in 2023.
And the outlook is promising. The company reported: “Demand remains strong … and we expect a good last quarter of 2024 financially.”
Back down to earth
But despite these good things, my investment could have many risks. That’s because, other than possibly mining, I can’t think of a more difficult industry to work in.
As you would expect from a listed company, the directors have given a lot of thought to the threats the group faces. They also identified 57 key strategic, operational, financial, and regulatory risks.
This includes everything from increased competition and lack of access to finance, to potential cyber attacks and prolonged industrial action by workers.
Looking at the risks, the most important right now seems to be potential problems with the supply chain. Problems with the Trent 1000 Rolls-Royce engine have caused British Airways to cancel a number of flights. If these problems continue, I doubt that IAG or Rolls-Royce will be the dominant players of the FTSE 100 in 2025.
Also, since 28.3% of operating expenses are caused by fuel and gas costs, any significant increase in oil prices could hurt the margin. Unfortunately, with so many world conflicts, this is inevitable.
What should I do?
When a company’s price tag works for a long time, I often think I’ve missed the boat. But given its attractive valuation, I still think there is plenty of room for this stock rally to continue.
The average price-to-earnings ratio of the 73 listed airlines is 8.88. Apply this to International Consolidated Airline’s 2024 earnings and it could be argued that the shares are 30% undervalued.
And in my opinion, despite the many potential risks, the airline directors have shown that they are able to meet them head on. After all, they managed to navigate the business through the unprecedented challenge of Covid.
So I will keep the stock on my watch list for when I get some spare cash.
Source link
