In the most recent reshuffle between the FTSE 100 and the FTSE 250, easyJet (LSE:EZJ) was promoted to the big league. The growth in the market cap has been evident, with easyJet shares up 37% over the past six months and 20% over the past year. With strong financial results out recently showing good momentum, should I jump in and buy the stock?
Strong latest results
The full financial year for easyJet runs through to the end of September. For 2023, it delivered a headline profit before tax of £455m. This was a huge improvement of the loss the previous year of £178m and shows the continued drive to get back to where it was before the pandemic.
The guidance for 2024 is also impressive. It expects to fly 42m seats in H1 and 59m seats in H2. If this is accurate, it would be roughly 10% growth versus 2023. Naturally, if the business is flying more passengers then I’d expect revenue to also be higher.
Further, it’s not just traditional flights that are making the business money. The package holiday division is growing. In fact, the business is expecting that area to grow by at least 35% for this coming year.
This is great because it helps to diversify revenue away from just air traffic. This helps to make the business a more appealing prospect for potential investors that want to invest in a broader travel business, not just an airline.
A fair value?
Even with the strong growth in the share price, the price-to-earnings ratio only sits at 12.57. It’s true that this is above my fair value watermark of 10. Yet this takes into account the latest earnings per share figure. So if earnings for the coming year are higher but the share price remains at the same level, the ratio will fall.
Based on that factor, I don’t think the stock is overvalued. Rather, I think it’s fairly priced and should appreciate in the future if earnings rise too.
Let’s not forget that the share price could rally from its inclusion in the FTSE 100. All the tracker funds for the FTSE 100 will now have to buy the stock to include it. Even though FTSE 250 tracker funds will sell the stock, there’s a lot more money tracking the FTSE 100. This means that overall there should be more buying than selling due to the promotion.
Risk and reward
I do acknowledge that the airline and broader travel sector isn’t for the faint-hearted. It’s very sensitive to customer demand, with good years being great but bad years being terrible. It’s also exposed to geopolitical situations around the world. For example, the Middle East conflict has hurt revenues for easyJet in the past few months.
Even with these risks, I think the stock looks very attractive. I’m seriously considering buying this growth stock now.
