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 easyJet 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 easyJet 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.

Should you invest £1,000 in easyJet 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 easyJet made the list?

See the 6 stocks

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

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

2 of the best FTSE 100 bargain shares to consider today!

These FTSE-quoted shares are among my favourite UK value shares to consider today. Give me a few minutes to explain…

Read more »

National Grid engineers at a substation
Investing Articles

A stock market crash could be the perfect passive income opportunity. Here’s why

Rather than fear a market crash, Mark Hartley considers how a savvy investor could use the opportunity to build a…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

3 world-class investments to consider for a Stocks & Shares ISA while they’re on sale

Dr James Fox believes the current stock market volatility may provide some investors with the opportunity to supercharge their Stocks…

Read more »