The easyJet share price has been up and down for almost a decade. I would like to know where it goes from here.
Most people have flown easyJet. It’s cheap, but maybe not so easy. I think critical operational considerations must be addressed before I consider investing in the shares.
Yes, the shares are down over 80% from their high. But good value doesn’t always mean I have an opportunity.
Operational strengths and weaknesses
easyJet’s low-cost business model is primarily what draws consumers to it. The company also has over 150 destinations in 36 countries available.
The organisation has continuously expanded through acquisitions and airport hub openings. By 2022, it had carried almost 70m passengers.
However, the company’s dependence on the European market makes it vulnerable to regional risks. A larger, more diverse revenue structure worldwide might provide me confidence if I owned the shares.
In addition, airlines seem to be particularly vulnerable to act-of-God-style events. Pandemics, natural disasters, and the like can wreak havoc on tourism, directly influencing easyJet’s revenue.
Let’s see if easyJet adopts strategies to enter electric or hydrogen-powered planes. This would keep it up to date with sustainability trends and more ecologically-focused consumers.
Financial considerations
Although the company trades at such a low price, severe financial concerns have come on my radar.
These include a 10-year average revenue growth rate of -7%, primarily driven by the pandemic. The good news is revenue growth has now reached 156% in the last year. The company is back on track.
However, I think the company’s share price may represent a ‘value trap’. This is when shares appear cheaply priced, but the cheap price is there for a reason. Hence, value investors get ‘trapped’ at the low price.
Why do I think this? While the forward price-to-earnings ratio is a palatable eight, I don’t believe the company’s financials are signifying a higher stock price any time soon. Forward price-to-earnings ratios take a company’s future earnings per share estimates into account and divide these by the share price.
In the income statement I see a lot of erratic numbers. British Airways owner International Consolidated Airlines Group had much more stable revenue growth before the pandemic, for example, not to mention margin stability.
For example, IAG’s revenue increase from 2010 to 2019 was from £7bn to £22bn. easyJet’s moved from £4bn to £7bn back to £6bn.
easyJet tickets and shares are not for me
I’ve analysed two core aspects here, and I think they are the most important when first assessing a value opportunity. These are revenue growth and valuation multiples.
Of course, I always ensure I have an operational understanding of what a company is doing that may be causing share price movements. Otherwise, I feel I’m not understanding the real world.
I have flown easyJet before, but I’ve never owned the shares. While I think the shares and the tickets are cheap, I guess you get what you pay for. I much prefer to fly British Airways if I can. While paying extra, I feel better for it. I think the same way about the shares that I own.
