So far this year, the stock market valuation of no-frills airline easyJet has gained a lot of altitude. Indeed, the easyJet share price is up 46% since the beginning of 2023.
But actually the shares had already made that gain – and a bit more – before the end of January. Since then, the price has moved up and down in a fairly narrow brand. That could suggest that it has hit resistance close to the £5 level that stops it from staying above that point for too long.
Has the price peaked for now? Or ought I to add some easyJet shares to my portfolio in the hope of further gains?
Good news priced in
I think the current price already factors in significant positive expectations for the airline’s fortunes. If that is the case, it could be that the share price will not move up much further in the absence of strong positive news.
After all, although easyJet is doing a lot better than it was a year ago, it still has challenges.
It lost over £400m in the first half of the year. That is not as bad as the same period last year, but it is still a lot of money to lose. Indeed, it is equivalent to around a ninth of the company’s total market capitalisation.
Revenue grew 80% compared to the same period last year, as holidaymakers and other passengers took to the skies again. But that was already expected by many investors. I think it was reflected in the sharp rise in the easyJet share price earlier this year.
Now, I think it is time for the company to grow into its valuation.
Valuation
The company forecasts full-year profits of over £260m based on current trends.
It remains to be seen whether it can deliver on that forecast. But even if it does, that implies a price-to-earnings ratio of around 14 at the current share price.
That does not look cheap to me. It looks reasonable though, if the company delivers on its full-year expectation and maintains or improves its business performance next year.
Whether that happens remains to be seen. Tightening household budgets could put a dampener on the rebound in travel demand. Inflation continues to add costs for airlines and fuel prices are still elevated. Indeed, in the first half, the carrier’s fuel cost (converted to pounds) per seat rose 71%.
No rush to buy
So although I do not think the share price is unjustifiably high, I do believe it already factors in high expectations. I do not see it as a bargain.
Later in the year if the results keep improving, I think the shares could rise again.
But for now I see no short-term driver for that. I feel the existing risks could push the shares lower again if they turn out to drag down performance. I therefore have no plans to buy in coming months.
