EasyJet‘s (LSE:EZJ) shares are still ridiculously cheap in spite of the market optimism sparked by lockdown easing. But is now the right time to buy them?
EasyJet’s stock plunge
As can be seen from the graph, the airline’s shares are starting to recover. But they still have not fully recovered from their March lows.
The reason is quite obvious. The coronavirus pandemic has led to a record fall in demand for flights. Tourism companies and airlines have suffered the most. Even though many countries all around the world are reopening now, the demand for flights is still close to record lows. There are still many travel restrictions. For example, in the UK there is still a 14-day quarantine for incoming travellers. It is so damaging for airlines that IAG, the British Airways parent company, is considering suing the UK government because of it.
The airline’s fundamentals
I have always liked easyJet’s business model. As opposed to British Airways, the company has targeted lower income customers, including students. The company has always been able to cut costs due to limited onboard services. As a result, the tickets have always been affordable to a lot of passengers.
Well, this is an advantage for the company if the world enters a prolonged recession. During recessions consumers are not able to spend huge amounts of money on travelling. The cheaper the airline tickets are the more consumers would be willing and able to buy them.
Credit rating agency Moody’s has taken the company’s competitive position into account when downgrading easyJet’s credit rating. The airline still has a lower investment grade credit rating which is way above its competitors’. EasyJet also became “leaner and fitter” by making 30% of its workforce redundant. This allowed the company to decrease its costs. Moody’s was also quite positive about easyJet’s financial position because of its £1.8bn cash cushion. It is quite a lot of liquidity but the company might have to borrow more. This will increase easyJet’s debt levels and put some additional pressure on its balance sheet. This might lead to another credit rating downgrade. Moreover, the agency expects the demand for flights to return to 2019 levels only in 2023.
This is why I wouldn’t buy easyJet’s stock
I perfectly agree with my colleague Edward Sheldon that easyJet’s stock is probably not worth the risk. The stock price is likely to stay depressed for a long time. In spite of the fact that many travel restrictions are being removed, the company estimates that over the July to September period the number of flights will still be 30% of its full capacity. And what if there is a second wave of Covid-19? Well, easyJet’s financial situation will deteriorate further and the company’s stock will collapse again.
So, investors, in my view, would indeed be much better off buying profitable and growing companies that are not that much impacted by the coronavirus pandemic. There are many such companies in the UK.
