After trailing its airline rivals in 2023, British Airways parent IAG (LSE:IAG) has seen its share price take flight lately thanks to surging travel demand. With significant room to grow further, IAG shares could actually be one of the biggest bargains on the stock market.
IAG’s recent half-year results crushed estimates. This was propelled by passengers paying higher fares, resulting in a tripling of operating profits, while leaner costs boosted margins. Yet, investors remain grounded by concerns about the economy, fuel prices, and airport strikes.
So, what makes IAG shares so alluring amid the current stock market storm? Firstly, travel demand shows no signs of ebbing, as passenger numbers and seats sold continue to recover. Second, IAG expects its non-fuel costs to fall by 6%-10% this year, thanks to effective fuel hedges. This should boost its bottom line.
The company has also shored up its balance sheet, slashing net debt by nearly €1bn since March. Its strong liquidity now will allow it to provide a smooth ride in case of unexpected downdrafts as was the case during the pandemic.
While its British Airways unit continues to lag behind rivals, the firm’s other airlines now exceed pre-pandemic capacity after navigating the worst of the Covid-19 storm. This shows that IAG possesses the scale, global network, and premium branding to emerge in pole position after turbulence subsides.
Cleared for higher altitude?
Nonetheless, questions still remain about its outlook moving forward in the stock market. How long until British Airways reaches full capacity again? Can corporate and long-haul demand fully recover? Will soaring inflation cool consumer appetite for travel? Is the IAG share price overbought?
Even so, long-term investors will be know that temporary clouds can often obscure the bigger picture when it comes to assessing a company’s investment thesis. Airlines face perpetual unpredictability after all, but IAG has the tools to traverse adverse conditions better than most.
With its stock locked in a deep valuation plunge, IAG offers substantial windfall potential in the stock market if optimism surrounding leisure travel remains strong. Recoveries require patience, but outsized gains typically follow periods of excessive pessimism.
Market downturns always feel interminable from the inside. But zooming out, IAG seems positioned to ascend to new heights in time. By overlooking short-term distractions, investors with strong stomachs could profit handsomely if IAG returns to cruising altitude.
Cheap fares for shares!
For long-term investors seeking hidden gems during the stock market’s turbulence, IAG shares may offer the most thrilling ride to tremendous wealth generation. While investors should pay attention to potential hazards, they shouldn’t discount potential either, especially from such a low base.
Currently trading at a price-to-earnings (P/E) ratio of just 4.7 after plunging over 90% in the pandemic, IAG shares offer massive recovery potential. This shows that with patience and perspective, massive opportunities can emerge from stormy skies.
Currently, analysts’ consensus shows that IAG’s share price could potentially soar over 200% from today’s bargain levels. Therefore, for risk-tolerant, long-term investors, IAG shares may offer one of, if not the biggest growth story on the stock market right now from its giveaway valuation.
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John Choong has no position in any of the shares mentioned. 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.
Motley Fool UK 2023