The IAG share price is dirt cheap and profits are flying. So why am I worried?

Young Black woman looking concerned while in front of her laptop

The International Consolidated Airlines Group (LSE: IAG) share price has inflicted severe pain on investors for years but not today. When I began writing this, the shares were up 2.5% in early trading after its full-year 2023 results reports “strong and sustained demand for travel” following a tough few years.

Few – if any – industries were hit harder by Covid lockdowns than airlines. The share price has plunged 61.52% over five years and 1.28% over 12 months. Post-pandemic volatility has dragged on and the cost-of-living crisis hasn’t helped.

Yet today the sun finally appears to be shining on the group, which owns British Airways, Iberia, Vueling, and Aer Lingus.

Is this stock finally on the up?

Full-year revenues jumped by 27.7% to €29.45bn, with operating profits soaring almost 175% to €3.51bn. Operating margins more than doubled from 5.4% in 2022 to 11.9%.

The company’s balance sheet looks a lot more solid, too, with strong free cash flow generation of €1.3bn. The ratio of debt to EBITDA (before exceptional items) fell from 3.1 times in 2022 to 1.7, below the board’s target of 1.8 over the cycle

Like the rest of the airline sector, including easyJet, which rejoined the FTSE 100 today, International Consolidated Airlines Group is slowly but surely putting the pandemic behind it. Capacity is almost back to pre-Covid levels in most core markets.

CEO Luis Gallego is now focusing on building long-term value by strengthening its core airline businesses and developing its successful IAG Loyalty scheme.

International Consolidated Airlines Group still has net debt of €9.25bn, albeit down from €10.39bn in 2022. City analysts reckon that will dip to €8.82bn in 2024. The group’s strong cash flows and solid debt-to-EBITDA ratio makes this debt less of a worry.

With a price-to-earnings ratio of just 3.88 times for 2023 and 4.57 times for 2024, the shares look shockingly cheap. It makes easyJet look expensive at 11.94 times earnings, while the sector average is around nine times.

International Consolidated Airlines Group won’t be paying any dividends in 2023, markets are looking forward to a resumption in 2024, when the stock is forecast to yield 1.87%. That’s not bad for starters.

Investors still seem sceptical

Would I buy it today? The outlook could get even better if inflation falls and interest rate cuts start to flow, putting money into customers’ pockets. Plus the cost of servicing its debts will fall.

At the same time, the sector is volatile by nature. Airlines have high fixed costs, and are vulnerable to events beyond their control, from economic or geopolitical worries, to potential strikes, bad weather and safety issues. A surge in the oil price, if the Red Sea crisis intensifies, is possibly today’s biggest concern.

Also, I’m a little baffled about the share price’s lack of spark. Investors seem incredibly sceptical about its prospects, which makes me worried that I’m missing something.

In fact, while writing this, the share has already given up its early gains and is down 0.45%. Clearly, I’m not the only one in two minds. I won’t buy it today while I dig deeper and gauge the market reaction. The IAG share price looks a bit too cheap for its own good.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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Harvey Jones 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.