The easyJet (LSE: EZJ) share price fell 7% on 12 October on the back of a full-year trading update.
The shares climbed in early 2023, but they’ve been falling back from those peaks. They’re still up 37% year to date, mind.
But we’re still looking at a big fall since the start of the pandemic. And checking forecasts, I can’t help thinking easyJet shares look too cheap now.
What happened?
When I saw the share price fall on update day, I assumed the news was bad. But it wasn’t.
In fact, the budget airline said it’s achieved all its 2023 financial targets. And that’s topped off by a record Q4 headline profit before tax (PBT), expected to be between £650m and £670m.
It’s been a story of a second-half turnaround, helped by 7% passenger growth, after a first-half loss.
The overall result should be a full-year headline PBT of £440m to £460m.
What next?
The easyJet board has high hopes for 2024, expecting to see a 15% year-on-year increase in capacity in just the first quarter.
And it has a medium-term goal of hitting more than £1bn in PBT. Yes, a billion.
Yet investors dumped the shares on the day. Stock market reactions often leave me scratching my head in puzzlement, even after decades of watching them.
Oh, easyJet has expansion plans in the pipeline too, with another 158 new aircraft due for delivery by the 2029 full year. And it’s also chosen to upgrade some planes as part of an existing order.
What’s it worth?
With easyJet recording a loss in 2022, it’s hard to come up with a meaningful historical valuation.
But broker forecasts indicate a price-to-earnings (P/E) ratio of nine. And with the year having gone as expected, I doubt that can be far out.
What’s more, they have earnings rises on the cards for the next two years, dropping the P/E to only a little over six by 2025.
And we could see a 4% dividend yield the same year.
What’s wrong?
That looks like great value to me, so why aren’t people snapping up the shares?
Well, airlines have a habit of lurching between profit and loss. They depend on so many external factors beyond their control. And especially when the global economy looks so dire, I’d rate the sector as being far from a safe one.
Fuel costs can be a big headache, and oil prices have been climbing since the summer. A barrel of crude now costs around $85, and could be set to soar higher.
Those are the reasons I’ve never bought airline shares, even when I see good value ones.
Will I buy?
I think I’ll stick with that. I’m just too old to change my strategy now.
And there are more than enough cheap stocks in the sectors I like best to keep me happy.
But if I did buy an airline, it would be easyJet. It can never really be a no-brainer, not with the external threats the industry faces. But it looks like a good value buy to me, for those happy with the risks.
