In the last three months, the easyJet (LSE: EZJ) share price has fallen 12%. Clearly, investor sentiment has weakened, which is not a major surprise given the outlook for the business. In the current year it is forecast to post a decline in its bottom line of 23%. In addition, its CEO recently announced her resignation, which means the stock faces an even more uncertain future.
However, with a wide margin of safety, strong business model and improving income prospects, easyJet could be a star performer in the long run. Alongside another, smaller, recovery stock, it could be worth buying right now.
Changing outlook
In the last couple of years, easyJet has faced a difficult set of trading conditions. The fall in fuel prices has cut costs for airlines, but has also meant that competition has increased. As well as this, demand across the industry has declined on terrorism concerns. This has contributed to a fall in sales and is a key reason for the company’s disappointing 2017 earnings outlook.
However, easyJet’s 2018 performance could represent a major improvement on that of 2017. It is expected to record a rise in earnings of 20% next year, a large portion of which is due to the company’s strategy. It has sought to boost capacity and also deliver a firmer load factor in recent quarters. This is in addition to the investment it has made in customer service and a focus on business passengers – both of which have strengthened the company’s customer base.
Investment potential
Despite its upbeat outlook for 2018, the stock trades on a price-to-earnings growth (PEG) ratio of only 0.6. This suggests that its 12% decline of the last three months may only be temporary, since its shares now offer a wide margin of safety.
As well as growth and value appeal, easyJet also remains a top income stock. It has a forward dividend yield of 4%, which is 20 basis points higher than that of the FTSE 100. Since dividend payments are set to be covered more than twice in 2018, there appears to be scope for further dividend growth over the medium term. With inflation moving higher and forecast to rise in future months, easyJet could become an even more attractive stock to own for the long term.
More recovery potential
As well as easyJet’s recovery potential, another company could deliver a turnaround in the long run. Developer and manufacturer of cadmium-free quantum dots (CFQDs) and other nanomaterials, Nanoco (LSE: NANO), has recorded a share price decline of 32% in the last three months. In fact, it released a full-year trading update on Friday which sent its share price 6% lower.
While its market is continuing to develop more slowly than originally anticipated, it is nevertheless making good progress with its commercialisation of CFQDs and is anticipating further orders from its pipeline of projects. It has a competitive advantage over rivals due to its market position, and its net cash position means it seems to have the financial strength to deliver improved share price performance in the long run.
