Key points
- The IAG share price should benefit from the large-scale reopening of international borders
- The company is undervalued and has a competitive price-to-earnings ratio
- Passenger numbers are now increasing with each quarter
Every airline in the world has suffered over the past two years. This is because of the pandemic leading the world to effectively shut down for a prolonged period of time. International Consolidated Airlines Group (LSE: IAG) is no exception. Operating globally, it owns British Airways, Aer Lingus, and Vueling to name only three of its brands. The pandemic is beginning to subside and international travel is returning. I want to know if the IAG share price could actually double this year. Let’s take a closer look.
Mixed fundamentals
One of the best markers for judging the growth potential of a stock is by looking at its price-to-earnings (P/E) ratio. This tells us if a company is over- or undervalued. IAG’s current P/E ratio is 2.13. By way of comparison, Air France-KLM, a major competitor, has a P/E ratio of 11.76. With the former’s figure so low, this suggests to me that the IAG share price is undervalued.
Furthermore, IAG has a debt ratio of 70.2%. This is the proportion of the company’s assets funded by debt. This comes in slightly higher than easyJet (LSE: EZJ), that has a debt ratio of 62.81%. Indeed, IAG’s debt pile is not insignificant and amounts to £20.9bn.
On the flip side, the company has retained earnings of 6.93p per share, which it may use for further acquisitions. One such endeavour was the takeover of Spanish airline Air Europa. This was terminated in December 2021 because of the pandemic’s impact on IAG’s finances. The takeover does, however, remain a possibility in the near future and would increase the stock’s Spanish presence, along with its Iberia brand.
Could the IAG share price really double?
An important benchmark for gauging how far the airline industry has rebounded since the pandemic is passenger numbers. In its third-quarter results in 2021, IAG reported a capacity increase of 43% compared with the same period in 2019. This was an improvement on the 2021 second-quarter figure of 22% with the same period comparison.
Furthermore, Switzerland is currently consulting on whether it should remove all entry requirements for tourists, regardless of vaccination status. If an affirmative decision is made on 16 February, many other countries may follow. This will inevitably be positive news for the IAG share price, because it further eases international travel.
The pandemic recovery period we are now entering has also given investment banks cause for optimism in the airline sector. Morgan Stanley recently stated that the “easing of travel restrictions in the UK and Ireland will drive strong pent up demand”. It also placed a target price of 250p for IAG shares, when it is currently 157p. Although JP Morgan expressed a general preference for short-haul carriers, it writes that “IAG should benefit from the reopening of transatlantic travel and a pick-up in corporate travel”.
Having held this stock for the entire pandemic, I’m optimistic about its prospects. I think the international reopening of borders will do great things for the IAG share price. This, together with its competitive P/E ratio, may well lead the shares to double in value. I will be adding more to my portfolio.
Andrew Woods owns shares in IAG. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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.
