IAG and easyJet among airline share tips for 2025
These two carriers have been popular investments over the past 12 months, but one analyst thinks next year could be a winner. City writer Graeme Evans explains why.
11th December 2024 12:50
by Graeme Evans from interactive investor
IAG has been named a City bank’s top airline pick after its analysts said the British Airways owner was well placed for another year of success following an “excellent” 2024.
On the sidelines for this year’s 85% share price rebound, Deutsche Bank has dumped its Hold stance in favour of a Buy one and backed the shares to rise another 40% to their pre-pandemic level at 400p.
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It believes benign competitor activity in long haul, especially on the transatlantic routes to which International Consolidated Airlines Group SA (LSE:IAG) has high exposure, and the supportive economic outlook in the UK, Spain and US should underpin another year of consensus-beating earnings growth.
The bank also expects that IAG will meet the target set at its 2023 capital markets day to deliver a margin in the 12-15% range, forecasting 14.3% in 2026 compared with last year’s 11.9%.
It said: “We think the journey towards a better BA has only just begun, and a key driver of the margin uplift is the £7 billion transformation programme which includes more than 1,400 initiatives.
“Improvements at Aer Lingus, the continued leveraging of the Spanish platforms and growing IAG Loyalty should also help.”
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IAG trades on a 2025 price/earnings multiple of 5.2 times and offers a 3% dividend yield underpinned by a 13% free cash flow yield. Deutsche Bank said these metrics compared very favourably versus IAG’s history, especially early cycle periods.
The share price performance of IAG during 2024 has easily beaten the next-best stock in Deutsche Bank’s European transport coverage, which is easyJet (LSE:EZJ) at 13%.
Network airline peers have been materially outperformed, with Deutsche Lufthansa AG (XETRA:LHA) and Air France-KLM (EURONEXT:AF) down 17% and 44% year-to-date.
The turnaround and IAG’s resumption of dividend payments, having distributed an interim 3 euro cents a share on 9 September, will have been cheered by those interactive investor customers who acted on a new year tip by our head of equity strategy Lee Wild.
He said in early January that an attractive valuation, growth potential and self-help “put IAG in a great position” to continue its recovery in the year ahead.
Deutsche Bank began the year thinking IAG would do well to repeat the 3.5 billion euros of operating profit and 11.9% margin delivered in 2023. However, it now expects year-end results to show 4.1 billion euros and 13.1% respectively.
It said the outperformance over European network rivals reflected greater exposure to customers higher up the fares' spectrum. Superior economic conditions in source markets and a stronger mix in terms of long-haul demand, particularly Latin America, have also helped.
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One-off events such as the Olympics impacted AF-KLM, while IAG avoided the strike action seen at Lufthansa.
Deutsche Bank said: “We expect a number of these attributes to work in IAG’s favour again in 2025. What’s more, while it is frustrating to have been on the sidelines in 2024, we think there is more to come from IAG in terms of the financial and share price performance.”
The bank’s preferred pick among the European low-cost carriers is easyJet, which it backs with a price target of 715p. This compares with today’s 574.8p.
It said: “We believe that the up-gauging of the fleet, lower winter losses and further growth in Holidays will help drive profits per passenger back towards historic peak levels.”
The bank notes that easyJet trades on a 2025 price/earnings multiple of eight times, versus the historical average of 11 times, and that the market capitalisation of £4.4 billion is just 0.7 times the second-hand value of the fleet plus net cash.
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