Are IAG shares overvalued after surging 20%?

IAG (LSE:IAG) shares have surged 20% over the previous month. It’s outperformed the FTSE 100 by far and has damaged out of vary — the inventory appeared range-bound for a lot of 2023. So why has IAG inventory surged and is beginning to look overvalued? Let’s discover.

Consensus improves

Analysts have grow to be more and more bullish on the British Airways and Iberia proprietor in current months. The inventory now has seven ‘purchase’ scores, 4 ‘outperform’ scores, and 4 ‘maintain’ scores. There are not any ‘promote’ or ‘underperform’ scores.

The common share worth goal can be a great way of understanding whether or not a inventory is undervalued or overvalued. At present, the common share worth goal for IAG is £2.25, which represents a 29.1% premium to the present share worth. That is positively a superb signal.

Nonetheless, it’s price allowing for that share worth targets aren’t at all times correct. They could be a nice barometer however its at all times worthwhile recognising they aren’t at all times up to date that regularly, which means they are often old-fashioned with some fast-moving shares.

Upgrades galore

IAG acquired a number of excessive profile upgrades in March that helped propel the inventory upwards. RBC Capital Markets raised its score to ‘outperform’ from ‘sector carry out’ whereas rising its IAG 2025 earnings per share estimate by virtually 60%.

JPMorgan Cazenove additionally gave IAG a double upgraded, anticipating the shares to rise to ‘obese’ from ‘underweight’. The group lifted the worth goal to €2.50 from €1.45 and, extra not too long ago, put the agency on ‘optimistic catalyst watch’ forward of Q1 outcomes.

Discovering worth

Whereas it’s nice to make use of brokerages’ steerage, it’s even higher if we are able to look to validate these positions with our personal calculations. IAG is forecast to earn 36.8p in 2024, 40.3p in 2025, and 43.7p in 2026. As such, it’s trying low cost at 4.8 times forward earnings. Shifting ahead to 2025, that falls to 4.3 occasions and 4 occasions in 2026.

That’s very robust information and the expansion prospects look fairly optimistic too. In truth, with a medium-term development fee of 5.8%, we come to a ahead price-to-earnings-to-growth (PEG) ratio of 0.81. This is likely one of the strongest PEG ratios I’ve come throughout on the FTSE 100.

I additionally want to match it in opposition to friends. Ryanair‘s the sector chief by way of the multiples it trades at. The corporate’s buying and selling at 16.2 occasions ahead earnings, 12 occasions forecasted earnings for 2025, and 12.2 occasions earnings for 2026. It’s clear the place the worth lies — IAG. Having in contrast IAG extra broadly with its friends, it does stand out as among the many greatest worth in sector.

The underside line

IAG presents good worth, based on the forecasts. Its enterprise technique additionally seems to be performing. Amongst different issues, it’s obtained a robust gas hedging technique that would give it a bonus in transatlantic routes the place its US friends don’t hedge — the caveat being IAG’s US companions don’t hedge both. Regardless of the hedging technique, aviation gas volatility does characterize a threat for IAG.

However lastly, whereas this would possibly sound trivial, IAG’s fleet is extra various than Ryanair, and is generally composed of Airbus plane. By comparability, Ryanair solely operates the Boeing 737 platform — together with 90 737-Max plane. There have been security considerations in regards to the plane, and manufacturing charges are falling. I’d relatively not fly on a 737-Max myself!