My wife’s taking her annual trip abroad with her friends. This year they’ve booked a package holiday. The plane was full and the resort is busy with holidaymakers. This makes me ask whether now’s the time to buy easyJet (LSE:EZJ) shares.
Up in the air
There’s an old joke that if you get two economists in a room, you’ll hear four different opinions. It’s a bit like that when it comes to choosing shares. Investors and analysts have differing views on the relative merits of individual stocks, and sometimes it’s difficult to cut through all the noise.
To overcome this, I like to compare my target stock with another in the same industry. And, if possible, one with a similar business model.
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With respect to easyJet, the most obvious comparison to make is with Jet2. Both offer flights as well as package holidays, although the latter derives over 70% of its revenues from breaks whereas the figure for its larger rival is less than 10%.
So how should I go about determining whether to invest in easyJet?
The ultimate test
According to McKinsey & Company, the single most important measure for an airline is the return on invested capital (ROIC). It’s calculated by deducting dividends from earnings, and dividing this by debt plus equity.
McKinsey argues that traditional measures of profitability don’t reflect the value of the aircraft that airlines own or lease. It’s a bit like a landlord measuring their profit without taking into account the cost of the buildings.
| Financial year | easyJet ROIC (% to 31 March) | Jet2 ROIC (% to 30 September) |
| 2018 | +6.07 | +5.01 |
| 2019 | +4.97 | +6.51 |
| 2020 | -8.72 | +7.82 |
| 2021 | -9.37 | -11.86 |
| 2022 | -0.25 | -10.37 |
Based on ROIC, it appears as though easyJet is performing better. Jet2’s figures are more recent, and therefore further away from the pandemic, which nearly destroyed the industry. But it still can’t beat its competitor’s ROIC.
However, I find it difficult to get excited about a company that’s making a negative return on its asset base. I therefore need to make a judgement about easyJet’s future prospects.
Flying high?
In May, the company released a trading update for the six months to 31 March 2023. And the update made for positive reading.
Flights are 73% booked in the third quarter of the current financial year, and 36% full for the fourth. This is an increase of one and three percentage points respectively, compared to the same point in 2022.
Revenue per seat for the third quarter is expected to be 20% higher and costs are broadly the same. The airline also has 9% more seats available for sale.
All this data suggests that the company will return to profitability in 2023.
| Financial year | Profit/(loss) before tax (£m) |
| 2018 | 445 |
| 2019 | 430 |
| 2020 | (1,273) |
| 2021 | (1,036) |
| 2022 | (208) |
A negative point is that the company last paid a dividend in March 2020. But there might be a small payout for 2023, if the company makes a profit this year.
Although easyJet faces a number of challenges that are outside its control — expensive fuel, rising interest rates, and strikes, to name a few — I’d be happy to include the stock in my portfolio. Revenue and earnings are moving in the right direction and I view it as a long-term growth stock.
Unfortunately, I don’t have any spare cash available at the moment to buy shares in the airline. But if my wife took fewer holidays, our family finances might be in better shape — only joking, my dear!
