Is it time to bail out of easyJet plc and buy GlaxoSmithKline plc instead?

A warning shot from easyJet plc (LON: EZJ) diverts attention to stable enterprises such as GlaxoSmithKline plc (LON: GSK)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The main takeaway I get from today’s half-year report from airline operator easyJet (LSE: EZJ) is that net cash from operations is down 40% compared to the equivalent period last year and the firm made an earnings-per-share loss of 5.1p, which compares to a profit of 1.3p per share last year.

No wonder, then, at 1,500p, the shares are down around 14% since the beginning of 2016. Whichever way we dress it up, this isn’t a good result for easyJet and the firm’s shareholders.

Precarious profits

The outcome here demonstrates what a precarious juggling act it is to keep an airline profitable and growing. During the period, easyJet faced pressure on its business from justifiably skittish customers due to travel strikes and terror attacks on European capitals.

Should you invest £1,000 in Petropavlovsk Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Petropavlovsk Plc made the list?

See the 6 stocks

That’s the thing with an airline: we never know when a natural disaster such as an Icelandic volcano or man-made disasters such as war, conflict, strike, terrorism or commodity speculation will shoot down the firm’s profitability. But it gets worse than that. Airlines are also at the mercy of macroeconomic events making airline businesses and their shares among the most cyclical on the stock market.

That cyclicality has implications about how the market is likely to value businesses such as easyJet. The more mature a macro-cycle becomes, the lower I would expect easyJet’s valuation to be as the market tries to anticipate the next cyclical down-leg by discounting high earnings in the boom times.

Consumer demand strong

Right now, easyJet trades on a forward price-to-earnings (P/E) ratio of nine for the year to September 2017 and sports a twice-covered 4.7% dividend yield. I wouldn’t expect a higher valuation than that, so any further share price progress probably needs to come from business growth rather than from a valuation rerating.

Carolyn McCall, easyJet’s chief executive says: easyJet has delivered a robust financial performance during the half year despite the well-publicised external events. Underlying consumer demand has been strong with UK beach traffic providing a healthy start to the half and easyJet’s biggest-ever ski season helping to deliver increased passenger numbers and higher revenue during H1.

Okay. But it’s precisely when things are going at their best that we should expect a cyclical top, often followed by a descent into the next cyclical bottom. Nobody knows when the top will arrive, but I’m taking these first-half losses as a warning shot and now I’m avoiding easyJet shares.

A more robust business model

Pharmaceutical giant GlaxoSmithKline (LSE: GSK) enjoys a more robust business model than easyJet’s. The stable nature of demand for medicines makes GlaxoSmithKline’s operation far less cyclical and keeps the cash taps flowing as consumers repeat purchase drugs.

Sure, the pharmaceutical industry had its challenges over patent expiry issues as once high-earning formulations lost exclusivity in the market and the firm saw a flood of generic competition erode profits. However, the company is moving on from that and hopes a new generation of blockbusters will return the firm to enduring growth.

City analysts following the firm expect earnings to grow 16% this year and 4% during 2014. At today’s 1,475p share price GlaxoSmithKline trades on a forward P/E rating of just over 16 for 2017 and yields a dividend of 5.4% covered just over once by forward earnings. That’s a fair valuation for a defensive business with reasonable forward growth prospects.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »