easyJet (LSE:EZJ) shares lost over 50% in value during the stock market crash back in early 2020. Even though the stock is up 14% over the past year, it’s still down over 30% from three years back and 50% from five years. Here’s why it could be a great buying opportunity now.
Where we are in the economic cycle
Over the course of a usual decade, the global economy goes through a cycle. This includes a period of economic uncertainty, followed by a period of strong growth.
Since the pandemic in 2020, we’ve been in an odd period in the cycle. Yet ultimately we’re in a low/no-growth period right now. In years to come, I believe that we’ll come out of this and hit a boom period.
Stocks usually perform better during periods of strong growth, rather than the murky waters that we’re in right now. For easyJet specifically, the stock still hasn’t recovered from the blindside tackle of the lockdowns and the impact it had on the travel sector. I think it’s undervalued today.
So when I put the current phase of the economic cycle together with the cloud that easyJet shares are still under from the pandemic, I feel it amounts to a once-in-a-decade opportunity.
Why I’m looking at the stock
I don’t think many would disagree with the elements behind an economic cycle. However, some could argue that easyJet isn’t the company to buy right now.
Stiff competition among low-cost, short-haul carriers makes it a tough industry in which to grow. And we can add into the mix a 22% rise in costs for the 2023 financial year, factoring in industry-wide inflation pressures.
These are definitely risks going forward, but the rewards could be large. In my eyes, the impact of the pandemic is firmly behind us. This is reflected in the 2023 results, with the firm posting a pre-tax headline profit of £455m, an improvement of £633m year on year.
Thinking about the potential
Although I think the travel sector has finally turned a corner, I don’t think the majority of the market has spotted this. I say so because easyJet has a price-to-earnings ratio of 10.98. This is about average, based on the current set of financial results.
But the ratio looks low to me when I consider what its future earnings could be. For example, in the 2024 financial year, easyJet holidays is expected to grow by as much as 35%. For H1 2024, it expects to fly 42m seats, up 11% year on year. If these forecasts are hit, then I’d expect profits to increase as well. I believe that makes the stock undervalued today.
Should we get a situation where easyJet outperforms this year, along with a spurt in economic growth in general, I think investors might look back and wish they’d bought some easyJet shares earlier. Therefore, I’m seriously considering buying some shortly.
