Worldwide Consolidated Airways Group’s (LSE: IAG) share price has dropped 15% from its 7 February one-year traded excessive of £3.68.

Nevertheless, it has executed so due to short-term elements which will disappear sooner quite than later, in my opinion.

This may make its bearish-looking share price seem like much more of a discount than I assumed it was earlier than.

What’s prompted the drop in share price?

The share price started to slip after the 1 February announcement of US tariffs on Mexico and Canada. Markets feared these is likely to be prolonged to different international locations.

After they duly had been on 2 April – together with on the UK — the share price fell some extra. The profitable North Atlantic routes comprise over 30% of IAG’s (because it’s recognized for brief) out there seat kilometres (ASK) in 2024. ASK measures the potential revenue-generating capability of an airline’s operations. 

An indefinite continuation of those tariffs stays a danger for the agency. That stated, IAG is engaged on increasing different routes in Latin America and Europe. Its Q1 2025 outcomes noticed a 7.1% year-on-year rise in its Latin America capability and a 1.8% improve for Europe.

Moreover, I feel it unlikely that these tariffs will stay a lot previous Donald Trump’s present presidential time period.

The opposite main issue that pushed its share price down was the latest escalation within the Iran-Israel battle. This raised jet gas costs and heightened market fears of key regional vacation locations being disrupted.

These are definitely dangers for IAG. Once more,although, I feel they’re unlikely to proceed for years.

That stated, IAG’s Q1 outcomes noticed working revenue soar 191% to €191m (£161m). Whole income jumped 9.6% to €7.044bn and internet debt fell 18% to €6.129bn. Its working margin greater than doubled to 2.8% from 1.1%.

How undervalued are the shares now?

IAG’s 5.9 price-to-earnings ratio appears to be like very undervalued towards its peer group’s 7.6 common. This includes Wizz Air at 5.6, Singapore Airways at 7.4, Jet2 at 7.6, and easyJet at 9.8.

It additionally appears to be like undervalued on its 0.5 price-to-sales ratio towards its opponents’ common of 0.6.

I ran a reduced money circulate analysis that reveals the place any agency’s share price must be, primarily based on money circulate forecasts for the underlying enterprise.

This reveals IAG shares are 49% undervalued at their present price of £3.14.

Subsequently, their honest worth is £6.16.

Will I purchase the inventory?

I’m properly over 50 now and deal with shares with a 7%+ dividend yield. These ought to allow me to maintain decreasing my working commitments. IAG solely pays 2.5%, so it’s not for me.

My latter level within the funding cycle additionally means my urge for food to take funding danger has diminished. Mainly, the longer the time remaining in somebody’s funding cycle, the extra time shares must get better from any shocks. And as has once more been highlighted over the previous 5 years, the airline sector is topic to many dangers.

That stated, if I had been even 10 years youthful I might purchase IAG shares. It has robust earnings development potential that ought to drive its share price and dividends a lot greater over time.

Consequently, I feel it properly well worth the severe consideration by traders whose portfolios it fits.