Iag At 610p – Will The Ascent Continue?

Surveying the market shore line for value, my searching eye was caught by International Consolidated Airlines (IAG), the rather long, plain faced name for a business which the advertising industry often portrays as incredibly glamorous. I speak of passenger airlines. As we all know, the glamour soon wears off once you have waited for a late flight at an uncomfortably crowded airport, like Heathrow!

International Consolidated Airlines (to which I shall refer as IAG for short, hereafter) is in fact the holding company of two airline companies, Iberia and British Airways, which were brought together in January 2011. It is now one of the largest airlines flying the globe, carrying a reported fifty five million passengers to 200 destinations.

However, British Airways provides the vast majority of company profits. Meanwhile, the Iberia service, which serves Europe and South America, turned in a £50 million operating profit in 2014 in contrast with the £166 million operational loss in 2013. The management of Willy Walsh has done a good job in doing deals with staff and unions, making IAG an increasingly cost efficient business.

At the same time, the north Atlantic business prospers with the recovery in the US and UK economies. It is noteworthy that revenue for IAG in Q4 of 2014 actually rose 9.9% (up 5.8% when you take out the currency movement). When you gear that top line growth with 0.8% improvement in constant exchange rate costs, geared again by greater capacity uptake (the famous operational gearing that analysts speak of) and once more by the balance sheet gearing of equity with 190% of debt, you have the ingredients for a powerful boost to earnings.

The market consensus estimates for IAG are currently for just under 70 Euro cents (this company does it accounting in Euros, which is currently trading at 1.36 Euros to the pound sterling) for the current year year to 31st December 2015 and 85 cents for 2016. A quick fumble with your calculator shows that represents estimated annual growth in earnings of a heady 68% this year followed by 22% growth next year. If the shares look thought provokingly expensive on an historic price to earnings ratio of over 18 times, those growth rates put it into context. On a traditional PEG ratio, which compares the PER number to the earnings growth rate number, the shares look reasonably valued on the basis that the PER number is less than the estimated growth in earnings number; and of course on the basis that these market consensus estimates are realized in the event.

Another benchmark for believing that these shares are good value is that attributed to a big US investment bank which argues that IAG is more comparable to US carriers than European carriers and that the valuation of the shares even at 18 times makes them cheap in relation to the US examples.

It is also to be noted that the share price is on a strong upward trend with only small share price swings above and below that trend, indicating that the downside on that technical ground will not be large.

The consensus forecasts show what is possible in terms of earnings growth when an operationally and financially highly geared company, with strong revenue growth and some cost cutting are all moving in the right direction. It is growth on speed. These shares at 611p, last seen, look alluring for the time being. Bear in mind that it is highly valued in PER terms until those 2015 estimates are landed. In guidance to the market the company said that it expected operating profits of around Euros 2.2 billion in 2015 on the back of a 5.5% increase in capacity. That represents a doubling of last year’s reported operating profit. If you are looking for exciting estimated forecast growth over the next nine months or so, have a look at IAG.