International Consolidated Airlines Group S.A.'s (LON:IAG) Shares Lagging The Market But So Is The Business
International Consolidated Airlines Group S.A.'s (LON:IAG) price-to-earnings (or "P/E") ratio of 6.8x might make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E's above 27x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
International Consolidated Airlines Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for International Consolidated Airlines Group
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like International Consolidated Airlines Group's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 6.0% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it's understandable that International Consolidated Airlines Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From International Consolidated Airlines Group's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that International Consolidated Airlines Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware International Consolidated Airlines Group is showing 2 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on International Consolidated Airlines Group, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.