IAG gets City backing after 20% share price slump
One of the UK stock market’s best blue-chip performers of the past six months has hit turbulence, but analysts still like buybacks, guidance upgrades and a cheap valuation.
11th March 2025 15:38
by Graeme Evans from interactive investor
IAG shares today traded at their cheapest level of the year as headwinds from across the Atlantic continue to dampen enthusiasm for the “less cyclical, higher-quality” British Airways owner.
The shares this afternoon traded way below 300p for the first time since 6 January, 20% lower than the 358p they were worth in the wake of forecast-beating results at the end of February. They were 288p after today’s US opening bell, but still 100p higher than their position in September.
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Concerns over the demand outlook on North Atlantic routes, which accounted for about 31% of International Consolidated Airlines Group SA (LSE:IAG)’s average seat kilometres in 2024, have fuelled the recent weakness.
Those worries heightened last night when Delta Air Lines Inc (NYSE:DAL) cut first-quarter profit estimates by half, having seen US companies curb spending due to economic uncertainty.
Source: TradingView. Past performance is not a guide to future performance.
Yesterday’s warning also impacted the shares of Holiday Inn business InterContinental Hotels Group (LSE:IHG), which reached mid-afternoon 338p lower at 8,762p.
IAG and its partners operate an average of 273 daily flights from Europe across the Atlantic, carrying 23 million passengers a year.
In 2024, British Airways retained its position as the leading European-to-US airline by operating direct flights to more than 30 cities in the US and Canada.
Aer Lingus also launched a new route to Denver and reopened one to Minneapolis, while Iberia added further frequencies to core destinations in the United States.
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Increased customer demand across the North Atlantic was a major factor in last month’s strong annual results as operating profit jumped by €936 million to €4.4 billion (£3.7 billion).
At 13.8%, it has delivered an operating margin more than double those of the other two largest European airlines - Deutsche Lufthansa AG (XETRA:LHA) and Air France-KLM (EURONEXT:AF).
Despite the threat of a US recession caused by additional tariffs, City firm Peel Hunt yesterday raised its price target on IAG by 20p to 420p.
It said: “We do not expect a mild recession to significantly impact the group, given constrained supply and BA’s exposure to higher net worth customers from older demographics.”
The bank also highlighted growth in loyalty and BA holidays, both of which offer low capital intensity and low cyclicality.
It has upgraded its earnings forecasts for 2025-27 in the range of 4-7%, reflecting annual results that were comfortably above its own and City estimates.
The note points out that the “Trump slump” provides scope for further upside as the US dollar and oil prices weaken.
In addition to the buyback of €1 billion announced with results and one of €350 million from November, Peel Hunt’s analysis sees scope for at least another €3 billion to be returned by 2028. This represents 16% of last week’s market capitalisation.
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Despite the buybacks and guidance upgrades, the shares trade at six times forecast 2025 earnings compared with Peel Hunt’s recommendation based on a multiple of eight times.
The bank said: “IAG is now a less cyclical, higher-quality business than historically. The group is profitable in all quarters and is developing capital-light businesses.”
It added: “Revenues and profits are rising. There is potential for further upgrades from additional capital returns, and the oil price and US dollar remaining at current levels.”
UBS recently increased its price from 280p to 320p but rates the shares at Neutral.
It sees potential headwinds from tariff and trade wars, a sluggish UK economy and the impact on the affluent traveller of VAT on private schools and other Budget measures.
The bank adds that a “disciplined” medium-term capacity growth target of 2-4% will mean the company is increasingly dependent on cost control and pricing to grow profitability.
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