With travellers taking to the skies in huge numbers again, business has been booming for airlines such as easyJet (LSE: EZJ). The easyJet share price has boomed 27% so far this year.
Could it go higher still – and ought I to buy some of the shares for my portfolio?
Down by two-thirds
Certainly, even after the recent increase, the easyJet share price has lost a lot of altitude over the long term.
The share price today is two-thirds lower than it was five years ago.
But passenger numbers have soared, ticket pricing is more favourable to the company than before and easyJet has retired £1.2bn of debt during its current financial year.
So, why are the shares still so far below their previous highs?
Changed environment
Like many airlines, during the pandemic easyJet was forced on the back foot and went into survival mode.
Although headline business performance is recovering well, some of the longer-term financial scars from that period continue to dog the company. It had £0.3bn of net cash at the end of its most recent quarter. That is a welcome move into the red after recent years of indebtedness. But it has been a long and difficult road getting to this position.
The airline raised money during the pandemic by selling millions of new shares. That diluted the individual ownership claim of each share on the overall business.
So, for example, even if the business was able to get back to spending the same amount on dividends as it did back then, this would mean that the dividend per share would not be as high as it used to be.
The pandemic also highlighted another risk that I think reduces the attractiveness of all airline shares, including easyJet. A sudden unanticipated event such as a pandemic can lead to years of plummeting sales and huge losses – and there is little if anything an airline can do to eradicate that risk.
Price outlook
Still, as the recent increase in the easyJet share price demonstrates, many investors have been warming again to the airline’s investment case.
The company has said that booking momentum is continuing. After three loss-making years in a row, it could yet turn a profit this year. For now, though, I am not convinced.
The headline loss in the first half shrank by nearly a quarter compared to the same period last year. But it still came in at over £400m. The second half may see a much stronger performance due to seasonal weighting, but that might not be enough to push the firm into the black for the full year.
Not only does the dividend remain suspended, but I think that could be the case for years to come. The company is still rebuilding financially, so a shareholder payout is likely not a high priority.
With a £3bn market capitalisation, I do not think easyJet shares are a bargain. It remains to be seen whether travellers will continue to shell out on discretionary travel at a time when household budgets are increasingly strained.
Strong results could yet push the share price higher from here. But I do not find the valuation particularly attractive and have no plans to buy.
