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International Consolidated Airlines (LSE:IAG) shares have been a star performer over the last month. At 335.3p per share, the FTSE 100 airline group has risen an impressive 19% in value since 5 May.
Yet, despite these heady gains, IAG’s share price still looks (on paper, at least) like one of the UK’s best blue-chip bargains.
Based on this year’s predicted profits, the British Airways owner trades on a price-to-earnings (P/E) ratio of 6.1 times. The rapid pace of expected growth means it also deals on a P/E-to-growth (PEG) multiple of 0.5.
Any reading below one implies that a stock is undervalued.
However, the British Airways owner also faces severe risks some may say warrant this low valuation.
So what’s the verdict? And should I buy the leisure giant for my portfolio?
Healthy conditions
While some major carriers have endured trading turbulence more recently, the broader airline industry has performed resolutely in spite of rising economic uncertainty, causing shares like IAG to spike.
Revenues at the Footsie firm rose by an estimate-beating 9.6% in the last quarter, it announced in May. Several of its rivals have also reported continued strong trading in recent months, from transatlantic competitor Air France-KLM to European budget specialist easyJet.
Yet resilient demand isn’t the only thing driving IAG’s share price skywards. Profits have been supported by falling oil prices on signs of market oversupply and reducing demand.
The company’s fuel cost per available seat kilometre (ASK) dropped 7.1% in the first quarter.
Is a storm coming?
Many analysts are tipping further oil price weakness as the global economy cools. Yet subdued economic conditions also pose substantial risks for airlines. Holidays are typically one of the first things to be chopped when consumers feel the pinch.
The European Travel Commission notes that “newly announced US trade tariffs have added heightened uncertainty to transatlantic travel.” This is no surprise given that US-European travel is more expensive than travelling on the continent. Still, it’s also possible that IAG could struggle to sell tickets on European routes if a pronounced downturn materialises.
I’m also concerned about ongoing controversies surrounding President Trump worsening declines on IAG’s transatlantic routes. Recent data shows a sharp and broad-based fall in US inbound travel since the start of the year.
Hotel bookings site Trivago has reported double-digit declines in bookings to the States from travellers in Canada, Mexico, and Japan. With Trump due to hold office until 2029, conditions could be bumpy for US travel operators for some time yet.
The verdict
Owning airline shares is risky at the best of times. Margins are wafer thin, and profits can sink amid a sudden rise in costs. Competition is fierce, the regulatory landscape strict, and the threat of strike action (by pilots, cabin crew, and airport and air traffic control staff) never far away.
But the danger of owning IAG shares is especially high today given the significant levels of economic uncertainty. On balance, I’m happy to avoid the FTSE company today despite its cheap valuation.
