This IAG (LSE:IAG) was very undervalued, according to City and Wall Street analysts. When I covered the stock in early August, the airline operator was trading at a discount of 42.8% to its average target share price.

So why have the stocks started trending toward their target price? And will they continue to rise from here?

Let’s take a closer look at this.

New catalysts

There are several reasons why IAG’s share price is rising.

The first is the decision, announced on 1 August, to withdraw from the proposed takeover of Air Europa. This removes significant regulatory risks, particularly from European Union antitrust regulators, and eases concerns about potential fines and operational disruptions.

A day later, IAG published solid financial results for the first half of 2024. Revenue increased year-on-year by 8.4% to €14.7 billion, and operating profit rose to €1.3 billion.

The company, which owns brands including British Airways and Iberia, also saw its net debt reduced significantly, by 31% to €6.4 billion, further strengthening its balance sheet.

New dividend, solid prospects

In order to support shareholders, IAG also announced a return to dividend payments with an interim dividend of €0.03. While this is great for investors, it also signals management’s confidence in the financial health of the company.

Looking ahead, management has underpinned this confidence with a growth strategy that includes a 4-5% capacity escalate by 2026 and an ambitious target of achieving an operating margin of 12-15%.

Analysts are forecasting profit growth of 4.8% annually through 2026, helped by forceful demand in major markets such as North America and Latin America.

This is not a world-beating growth rate, but airlines are cyclical. We have recently experienced two years of incredibly forceful ticket price growth that is unsustainable in the long term.

And for context, Ryanair announced a 46 percent drop in first-quarter profit in July, noting that summer ticket prices would be significantly lower.

Therefore, analysts’ forecasts for IAG look quite promising.

IAG Summary

If demand for air travel slows, IAG may be in a better position than its budget rivals, simply because it has a more diverse offering tailored to business travel and offering more seating options.

This is something I really like about IAG.

I also like that it is less dependent on Boeing than Ryanair and most U.S.-listed airlines. Boeing’s quality and delivery problems have resulted in lower capacity across the industry.

So there must be something to worry about? Well, debt is something to worry about. Net debt is around €6.4 billion, which is about half of market capitalization.

Currently, servicing this debt does not appear to be a problem, but if we were to experience some shocks — for example, a significant escalate in fuel prices — and incomes were to fall, the debt would become more problematic.

Despite all this, I remain bullish on IAG, expecting modest earnings growth from a company that trades at just 5.3 times forward earnings and an EV-to-EBITDA multiple of 3.2 times.

It may be a little more exorbitant than easyJetbut it has a more diverse offering and is much cheaper than Ryanair and other American companies.