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Worldwide Consolidated Airways Group (LSE: IAG) seems to be a transparent undervaluation alternative to me proper now.
The shares are nonetheless priced as if the group, generally known as IAG, have been a fragile publish‑pandemic restoration play fairly than a structurally improved, cash-generative operator.
For buyers keen to look previous this lingering low cost, I consider the pricing nonetheless understates the group’s earnings energy.
So, what may the shares actually be value?
What are the important thing earnings drivers?
The engine for long-term rises in any firm’s share worth is earnings (‘profits’) development.
A key danger to IAG is its margins being squeezed by aggressive low-cost short-haul carriers and growing long-haul competitors. Nonetheless, the consensus forecast of analysts is that its earnings will develop by a median 5.2% a yr to end-2028.
This regular earnings trajectory is underpinned by a number of structural drivers. IAG continues to learn from resilient long-haul demand — described as “strong” throughout its community in its nine-month 2025 outcomes.
Operational streamlining, together with fleet modernisation, helped to ship an increase in working margin to 22% within the 9 months. Extra of that is to return, with additional fleet upgrades this yr and subsequent. Moreover, its strengthened steadiness sheet — with internet leverage of simply 0.8 instances — and recovering money flows permit for additional funding in greater‑yield routes.
How did the most recent outcomes form up?
Within the nine-month outcomes, income rose 4.9% yr on yr to €25.23bn (£21.96bn), supported by resilient long-haul demand throughout the community. Working revenue grew 18% to €3.93bn, highlighting the advantages of fleet modernisation and operational streamlining.
Revenue earlier than tax jumped 22% to €3.62bn, whereas adjusted earnings per share climbed 27% to 55.5 euro cents. These numbers underline bettering profitability and reinforce the structural drivers behind the consensus earnings outlook, in my opinion.
IAG reiterated its medium‑time period ambition, outlined as the following 3-5 years, for a 12%-15% working margin (towards 13.8% in 2024).
How a lot are the shares actually value?
The discounted money move (DCF) mannequin is the optimum strategy to verify a share’s true value, in my expertise as a former senior funding financial institution dealer.
It estimates a inventory’s ‘fair value’ by projecting the corporate’s future money flows that replicate consensus earnings development forecasts. It then ‘discounts’ them again to immediately utilizing a fee that displays the danger of proudly owning the shares. As such, it produces a clear, standalone valuation, unaffected by over- or undervaluation throughout a enterprise sector.
Some analysts’ DCF modelling is extra bearish than mine, and a few extra bullish, relying on the inputs used. Nevertheless, based mostly on my DCF assumptions — together with a ten.1% low cost fee — IAG is 39% undervalued at its present £4.13 worth.
Due to this fact, its honest worth may secretly be near £6.77 a share.
And since asset costs usually commerce in the direction of their honest worth over time, this means a probably terrific shopping for alternative to think about immediately if this modelling proves correct.
My funding view
IAG’s stronger steadiness sheet, bettering margins, and regular earnings outlook make the valuation hole laborious to disregard, in my opinion.
For me, the airways sector carries extra danger than I would like at this stage of my funding cycle. I’ve my eye on a number of excessive dividend-yielding shares, additionally with sizeable valuation gaps.
Nevertheless, much less risk-averse buyers might discover the present low cost an interesting alternative to discover.
