After a spectacular start to the year easyJet’s (LSE:EZJ) share price has failed to make progress in 2023. In fact, the FTSE 250 airline has recently backpeddled due to rising risk aversion on financial markets.
As someone looking to pick up bargains following recent market volatility, this drop has grabbed my attention. The airline’s forward price-to-earnings (P/E) ratio has fallen even further below the value watermark of 10 times.
At 451p per share, easyJet trades on an earnings multiple of 9.1 times for this financial year (to September). Predictions of sustained, double-digit growth through to 2025 drive the ratio to as low as 6 times for the end of the period too.
So is the company too cheap to miss at current prices?
The good
The travel industry post-pandemic recovery has beaten even the most optimistic of forecasts. And the pace of the rebound continues to impress, as easyJet’s recent half-year financials showed.
Revenue leapt 34% in the six months to March, to £2.4bn, while the firm flipped back into pre-tax profit of £203m from losses of £114m a year earlier. Passenger and ancillary revenues both soared as capacity leapt to 90% of 2019 levels.
Reflecting these strong numbers, City analysts expect the company to move back into the black this year. Earnings per share of 48.43p are tipped from losses of 19.6p last year. And the bottom line is expected to grow another 19% and 28% in fiscal 2024 and 2025 respectively.
The bad
So why are analysts mixed on whether easyJet shares are a good investment? Of the 20 brokers with a rating on the stock, 12 record a ‘buy’, five are ‘neutral’ and three have slapped a ‘sell’ rating on it, according to stock screener Digital Look.
The trouble is that airline stocks are highly cyclical. When times are tough, holidaymakers and businesses spend less on travel. So difficult economic conditions across its European marketplace casts a long shadow over the company.
Sudden cost rises are another danger to profits. Airline margins are notoriously thin, so any uptick in expenses can take a significant bite out of the bottom line.
Hedging on fuel helps reduce the potential impact of soaring oil prices, but easyJet isn’t immune. Rising pilot and cabin crew salaries are another big consideration for investors.
Finally, the threat of industrial action is never far away for Europe-focused airlines like this. In fact, easyJet recently said disruption at air traffic control is at “unprecedented” levels, with strike days in the year to date up 40% from 2019 levels.
The verdict
As I say, easyJet shares seem to offer excellent value, at least on paper. And it clearly has the wind under its wings right now.
However, I don’t fancy picking up this airline stock for my portfolio right now. It still faces many problems that could hamper long-term profits growth.
And I don’t feel as if I need to take a risk by buying its shares. After all, there are plenty of quality UK stocks I can pick up cheaply following recent market volatility. I’d rather spend my money on other FTSE 100 and FTSE 250 shares today.
