Airline travel was decimated by the pandemic. Most of the market leaders saw their stock prices slump as flying hours decreased to near zero. easyJet (LSE: EZJ) was no different and saw its stock fall over 60% between February and March 2020.
In 2022, even though flying hours have drastically improved, easyJet shares are still down 41% year-to-date. Over a 12-month time span, the shares have fallen 47%. I think this could be a prime opportunity for me to buy the stock at a beaten-down discount. Let’s explore why.
Encouraging results
In easyJet’s Q3 2022 results, it reported some strong figures. Although the group posted a loss of £114m, it managed £1.7bn in revenue. For context, for the same period in 2021, group revenue was just £213m, highlighting the impressive recovery. Its losses also shrank by £200m from Q3 2021.
Aside from growing revenues, one of the most encouraging metrics I saw was the decrease in debts. The airline sector is notorious for being saddled with high levels of debt after the pandemic, with players like IAG still sitting on over £8.5bn in debt on its balance sheet. easyJet, however, has a modest £200m debt, down from £600m in Mach 2022. With interest rates on the rise, it’s very encouraging to see the group trimming its borrowings.
Global passenger traffic is also still recovering. The airline reported that it’s now operating at 87% of FY19 capacity, which is very reassuring. It’s expected that in 2022, over 3.5bn passengers will board flights, up from just 1.8bn in 2020. This should help easyJet increase its top-line revenues and drive itself back towards profitability.
Not out of the woods yet
There are still a few risks that easyJet must overcome. For starters, the Russia-Ukraine crisis has sent oil prices skyrocketing. Although easyJet has announced that it has 83% hedged fuel for Q4, rising costs are something it will have to contend with in the future. That’s especially so considering inflation is showing no signs of slowing down.
In addition to this, the cost-of-living crisis (also caused by red-hot inflation) means workers are taking strike action. The problem is that if easyJet doesn’t find extra cash for wages, then strikes will continue and operational efficiency will be greatly hindered. However, if it does agree even a small increase in wages, it will have to shell out millions in extra costs as it employs over 13,000 people.
Why I’m buying
For me, easyJet is a prime example of a good quality stock beaten down by Covid-19 and inflation-related market sentiment. It has decreasing debts, rising revenue, and passenger footfall is set to keep rising in the near future and beyond. All of these factors signify to me the stock could surge in the near future. Yes, rising costs still pose a risk, however, the hedged fuel serves to mitigate this in the short term. For those reasons, I’m looking at adding easyJet shares to my portfolio today.
