Before the arrival of the pandemic, easyJet (LSER: EZJ) shares demonstrated white-knuckle volatility.
And that’s an outcome mostly driven by the huge cyclical influences that affect airline and travel companies.
Many things can wreak havoc with easyJet’s profit margins. For example, volatile costs such as airline fuel. And fluctuating passenger demand because of the ups and downs in the economy.
And that’s even before considering the shocks delivered by black-swan events like the pandemic and the war in Ukraine.
A high-volatility proposition
So, right from the start, I want to make it clear that easyJet is not a stock for widows and orphans. And it’s not one to tuck away and forget about either.
However, that doesn’t necessarily mean it can’t contribute to making me rich in a diversified portfolio. But investors need to work hard about timing buys and sells. Those regular swings on the chart can be used to advantage as well as having the potential to whip prior gains away.
In case anyone doesn’t know, the business provides flights and package holidays. And operations are mainly in Europe.
It’s worth noting that Sir Stelios Haji-Ioannou founded the airline in 1995. And the Haji-Ioannou family still owns just over 15% of the company’s shares, making it the largest shareholder. And Sir Stelios separately owns easyGroup IP licensing Ltd.
That company owns the easy brand and licenses it to the airline and to other companies.
Therefore, the ownership framework means the Haji-Ioannou family still commands much influence and has the potential to affect any investment we may make in the stock. However, for the time being, I don’t see the set-up as a problem. It’s just something to be aware of.
An upbeat announcement
Meanwhile, on 20 July, easyJet released its third-quarter trading update covering the three-month period ending on 30 June 2023. The tone is upbeat. And the headline states that “easyJet performs strongly delivering a record (Q3) PBT (profit before tax)”
I won’t bore anyone with the figures because if they’re interested, the report is but a mouse click away on the London Stock Exchange website – and it’s all free.
However, chief executive Johan Lundgren said the third-quarter performance was underpinned by strong passenger demand. And around half the company’s fares are on sale and under £50.
Lundgren reckons the company is “absolutely focused” on mitigating the impact of the challenging external environment for its customers. And there’s good momentum in the business.
Looking ahead, the directors expect to add around 15% more capacity for the coming winter. And that’s because they think bookings will likely be ahead of the previous year’s winter outcome.
Meanwhile, with the share price near 481p, the forward-looking earnings multiple is just below nine for the trading year to September 2024. And the anticipated dividend yield is about 3.8%.
That’s not an outrageous valuation. But the company probably doesn’t deserve a richer rating because of the issues I’ve mentioned.
Nonetheless, even cyclical businesses can grow market share long term. And I think plumbing supplies company Ferguson is a good example of a cyclically sensitive company delivering a decent long-term outcome for its shareholders by growing its business.
easyJet is a strong brand. And it has the potential to help make me rich as part of a diversified portfolio. But there’s also risk here.
