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Are we truly out of the woods with Covid? The markets seem to suggest so as several of the stocks most battered by the virus are inching higher. Even FTSE 100 stocks like International Consolidated Airlines Group (LSE: IAG), in the travel industry and attacked on three fronts by lockdowns, high fuel costs and a cost of living squeeze are beginning to take off. IAG shares rose to a four-year high in recent weeks, doubling since 2022 and up 43% in the last year.
What’s baffling is how undervalued IAG still looks. It trades at around five times earnings, cheap by any measure but around half the valuation of FTSE 250 rival easyJet and a third of the ‘fair value’ average of the FTSE 100. Compared to pre-pandemic figures, IAG shares are still over 50% down too. There might be plenty of runway for the firm to keep on flying.
Sharp reminder
Before I start declaring the stock an unmissable bargain, let’s look at the bad stuff here. For one, Covid may be more or less out of the picture but a terrific hangover remains. Any investor looking at a stock related to international travel might wonder what fresh crises are on the horizon. A new virus? A war? Some unpredictable black swan event? The world has had a sharp reminder that the idea of planes flying all the time to everywhere is a novel one and a fragile one at that. That’s going to dampen the share price for many years to come I would think.
On the plus side, folks have swiftly regained their interest in flying. New passenger records seem to be broken on a monthly basis, most notably at Heathrow where the British Airways owner accounts for half of all slots.
This has led to revenue that has caught up to pre-pandemic numbers and then flown past it. Last year’s sales of £25bn are around 20% higher than 2019 sales of £21bn and are expected to rise further. Revenue has increased too across all of the firm’s major airlines (BA, Iberia, Aer Lingus and Vueling) and all of its markets (USA, UK, Spain, Rest of World). If there’s a reason not to invest here, it certainly isn’t consumer demand.
Nothing to sniff at
The money coming in has boosted the bottom line too and the firm posted a significant beat on operating profit recently. The cash has been used to pay down a debt pile that is nearing 2019 levels, another plus point compared to competitors that are paying off those big pandemic costs. Money is available too for the resumption of a dividend. Investors can expect around a 4% yield in 2025, nothing to sniff at if the shares can continue their current trajectory.
While I’ve been cautious around travel-related stocks for the reasons listed above, this is one I’m adding to my watch list.
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