Since the start of the year, shares in Jet2 (LSE: JET2) have risen 20%. Over the past five years, the shares have increased by 38%.
The company’s interim results were released today (23 November). They contained lots of positive news, from surging profits to an one-third increase in the interim dividend.
Buoyant trading environment
With tourists taking to the skies again on a big scale, it is no surprise that the six months were good ones for Jet2.
Compared to the same period last year, revenues rose 24% and basic earnings per share soared 39%. Those are strong numbers, in my view.
The company maintained the same average load factor as in the prior-year period, filling nine out of 10 seats. The company is sitting on over £2bn of its own cash, excluding customer deposits. Its net cash is £1.8bn.
Jet2 expects to deliver pre-tax profit for the full year, excluding exchange rate impacts, of around half a billion pounds. Clearly, the airline and travel operator’s well-honed business model is helping it benefit from buoyant demand for travel.
Are the shares a bargain?
Set against that profit forecast, the company’s market capitalisation of £2.4bn makes it look like a possible bargain.
Over the long term, the Jet2 share price has been growing. Its business model has proven itself and the shares trade on a single digit price-to-earnings (P/E) ratio.
Based on that, I think the shares are a potential bargain.
I do see risks though. High fuel prices are a perennial risk to airline profitability even if they can fill their planes. On the demand side, any future event that suddenly causes demand to fall is a threat to revenues and profits. A weak economy could also hurt demand.
Why I’m not buying
Those risks concern me, particularly the demand one.
The Jet2 share price looks cheap based on its P/E ratio, but earnings could fall sharply if there is a sudden fall in demand. That could be triggered by a host of reasons totally outside the airline’s control, from a pandemic to volcanic eruptions. In the past six months alone, the business had to contend with a failure in Britain’s air traffic control system, as well as floods and wildfires in Greece.
It is that unpredictability when it comes to sudden demand shocks that puts me off investing in airline stocks generally.
Jet2 is more than just an airline. It had more package holiday customers than flight-only passengers in the first half. The average package holiday price was around seven times the flight-only ticket yield per passenger sector, although presumably a lot of that money needs to get passed on to suppliers like hotels. But the airline operation is central to the package holiday offering. So I think the risk of any disruption to flights is a risk for the whole business.
I do think the Jet2 share price looks cheap for what I consider to be a well-run business with high profit potential. But I am not comfortable with the risks of owning an airline stock and will not be investing.
