The recent downturn in shares of International Airlines Group (IAG), which owns Iberia, has caught the attention of investors and analysts alike. As of March 27, 2025, IAG shares fell by 0.57%, trading at 3.516 euros. This decline marks a significant drop of over 20% from their annual high of 4.41 euros, reached on February 7, 2025. The drop in share price coincides with a downward revision of IAG's price target by Morgan Stanley, which has reduced its forecast from 4.8 euros to 4.6 euros per share.
Despite the adjustment, the new target still suggests a potential upside of approximately 30% based on the previous day's closing price. Morgan Stanley's cautious outlook contrasts with the broader consensus among market analysts, who continue to view IAG shares favorably. According to Reuters data, the average price target among experts stands at 4.71 euros, indicating a potential increase of 34% from current levels.
Over the past year, IAG has experienced a remarkable surge in its stock price, rising by an impressive 91.7% from a low of 1.834 euros in April 2024. This growth reflects a robust recovery in the airline sector and improved financial performance. In 2024, IAG reported a net profit of 2.732 million euros, which is a 2.9% increase compared to 2023. Additionally, the company's operating profit reached 4.283 million euros, representing a substantial year-on-year increase of 22.1%.
Conor Dwyer, an analyst at Morgan Stanley, noted that a slowdown in capacity growth has historically been a strong predictor for European airlines, suggesting that investors should keep a close watch on this trend. Capacity growth peaked at 8% in January 2025 and is anticipated to decline to 4% by September 2025. Dwyer cautioned that there are signs indicating a potential slowdown in air travel demand in Europe, highlighted by recent profit warnings from U.S. airlines and weakening demand for transatlantic travel.
In light of these developments, Morgan Stanley has revised its EBIT estimates for IAG for fiscal year 2025 down by 2-6%. Despite the cautious stance, Dwyer pointed out that the relative performance of airline equities during late-cycle periods is typically positive as reduced capacity supports revenue yields.
Moreover, Dwyer emphasized that IAG's current valuation remains attractive, trading at 4.9 times EV/EBIT for 2025 and 5 times PE for 2025, with a free cash flow yield of 13.5%. He believes that IAG's growth in capacity across the North Atlantic is likely to remain stable in the medium term, which bodes well for the company's stock performance.
Another key factor for IAG’s future is the expected turnaround for British Airways, which is anticipated to significantly impact the overall performance of the group. With increased customer loyalty and profitability in the Iberia market, IAG is positioned to achieve structurally higher margins compared to pre-COVID levels.
Despite the recent stock price decline, the fundamentals of IAG suggest that it remains a solid investment opportunity. The current market correction could be viewed as a buying opportunity for investors who are confident in the airline's recovery trajectory. The consensus among analysts continues to lean towards a 'buy' recommendation for IAG shares, reflecting optimism about the company's performance in the near future.
In summary, while IAG faces challenges in the current market environment, its strong financial results and potential for recovery keep it on the radar of investors. The recent price target adjustments by Morgan Stanley, while conservative, still indicate a substantial upside potential, suggesting that IAG could rebound as the airline industry continues to recover from the impacts of the pandemic.
