Everyone loves a bargain, especially when it comes to investing in great companies that the market has perhaps wrongly sold-off. So, if you’re like me and you see a company with five straight years of double-digit earnings per share growth trading at a 9.6 forward P/E and offering a 5.3% yielding dividend you do a double take.
Now, when I tell you that company in question is easyJet (LSE: EZJ) the market’s current reticence makes more sense. But does that mean the shares aren’t a bargain?
The bad news is that the market sell-off isn’t without cause. The UK’s favourite budget airline did slip into a £23m operating loss in the first six months of the year. Add in the psychological effects of Brexit and a weaker pound on British tourists, terrorism fears on the Continent and an industry-wide increase in supply and the shares’ -40% performance in 2016 makes considerable sense.
However, there are a few things that still earn easyJet a place on my medium-term watchlist. First, the airline does have market-leading share in the critically important UK market.
Second, the company’s balance sheet is in rude health with £296m net cash at the end of March and net debt of only £474m when including aircraft leases. Compared to 2015 operating profits of £688m, this level of leverage is perfectly acceptable.
Third, shareholder returns should be quite safe as analyst consensus forecasts call for earnings to cover dividends a full 2 times over this year.
All of this points to a healthy company in what we shouldn’t forget is a very cyclical industry. I wouldn’t pull the trigger yet as oversupply is a real problem and fares are likely to fall across the board in the coming quarters. But easyJet remains a quality company that could be worth a closer look if the sector continues to take a beating.
Wait and see?
Headline numbers are equally intriguing for London homebuilder Telford Homes (LSE: TEF). Shares are currently offering a 4.7% yield while trading at a mere 8.3 times forward earnings, figures that are sure to attract any value investor.
The answer to why shares of Telford are down 22% year-to-date lies with fears that Brexit will lead to a cooldown in London’s red hot property market. Short term figures suggest this is the case in ritzy areas of Central London for high-end flats and homes. The good news for Telford shareholders is that management has long concentrated on London’s outer postcodes where prices are less eye-popping and demand more sustainable.
Demand for Telford’s developments is apparent in its success in pre-booking sales representing roughly 50% of revenue over each of the next three years, which offers the company significant downside protection.
The company’s balance sheet is also a positive as the company has only drawn down £40m of its £180m credit line and has £20m in cash on hand, leaving plenty of room for acquiring further properties.
Telford shares may look like a bargain as the company continues to increase revenue and profits at a double-digit clip. But investors need to remember that housing, even in London, is cyclical and any shock from a hard Brexit could be catastrophic. Telford is a quality company but I would be waiting until we have a clearer picture of what Brexit will look like before contemplating beginning a position.
