Everybody loves to see a business performing well, especially during a time of slow market growth. While the FTSE 250 isn’t doing too badly (up 11% in the past three months), one company in particular is far ahead of the competition. But rapid, extended growth is not always a good thing, often preceding a correction that sees the share price fall as quickly as it grew.
As the saying goes, ‘What goes up must come down.’
With that in mind, I’m taking a close look at the current leader of the FTSE 250 index, easyJet (LSE:EZJ). With a share price that’s up 33% in the past three months, the airline could be on route to reclaim its place in the FTSE 100.
A positive outlook for FY24
In its latest results for the twelve months ending 30 September 2023, easyJet revealed record summer performance. Profits for its holidays division were up 221%, bringing its pre-tax headline profit to £455 million.
The announcement boosted the share price by 20% and prompted a positive forecast for 2024, with earnings expected to grow 35% in the coming year. What’s more, dividends have been reinstated at 4.5p per share, payable in early 2024.
But with the share price now near a 24-month high, I’m wondering if I missed the boat (or plane, that is).
Prepare for landing
When share prices rise quickly like this, I typically expect a price reversal in the short term. But despite the rapid growth, analysts don’t appear to be forecasting an imminent correction for easyJet. JP Morgan recently reinstated its neutral opinion for the airline, mirroring similar ‘hold’ recommendations I’ve seen from many other analysts.
Looking at technicals, I worry that a correction could reverse the share price as fast as it grew. After breaking resistance at 453p in November last year, the easyJet share price climbed rapidly above 500p. In the event of a correction, the 453p level would act as mild support – but a break below may only find support at 350p.
The key factor to account for
So what is the one factor that I believe could result in a correction for easyJet?
Fuel, of course.
Decreasing jet fuel prices helped boost easyJet’s earnings in Q4 of 2023 but now they’re back on the rise. If prices continue to increase, it could spell trouble for easyJet’s 2024 outlook. The airline’s business model is built around low-cost flights – something that’s difficult to achieve without cheap fuel.
If fuel prices keep rising in Q2 this year, the airline will need to make some tough decisions. Either it absorbs the extra cost or raises ticket prices, negating its key selling point. Considering that other airlines will need to make similar choices, easyJet may be able to remain ‘cheap’ by comparison.
For now, I think the airline is in a good position, but I’ll be keeping an eye on fuel price increases over the coming months.
