After avoiding a FTSE 100 exit, here’s what the charts say for the easyJet share price

Charlie Carman investigates where the easyJet share price could head next after the short-haul carrier escaped a demotion to the FTSE 250.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: easyJet plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A boost in the easyJet (LSE:EZJ) share price over the past month has allowed the low-cost airline to cling on to its place in the FTSE 100 index. The company had been tipped for potential relegation from the UK’s leading benchmark in this week’s quarterly reshuffle.

As a shareholder, I’m pleased by this news. However, I’m also acutely conscious that easyJet shares are still down 62% from their pre-pandemic high.

Here’s what the charts say about the outlook for the Luton-headquartered business.

Valuation

Using the price-to-sales (P/S) ratio as a valuation metric, easyJet shares have traded firmly back in cheaper territory for the past couple of years. Back in 2021, the stock looked pretty expensive as sales were decimated amid pandemic travel restrictions.

Currently, the stock has a P/S ratio of 0.41, which suggests it’s a potential bargain at today’s price of £4.82. Generally, any ratio below one is seen as a very attractive number.

Source: TradingView

However, it’s worth treating this figure with a degree of caution. Multiple airline stocks have had their valuations depressed for a while now as the market digests their future in a post-Covid world.

For instance, FTSE 250 competitor Wizz Air looks a bit cheaper on this metric with a P/S ratio of just 0.36 and easyJet’s FTSE 100 bedfellow IAG also has a lower 0.39 multiple. Accordingly, the stock’s valuation isn’t especially cheap when compared to the wider industry.

Debt

Overall, easyJet’s balance sheet appears to be in good shape. In the first half, the company moved into a net cash position of £146m, having ended FY23 with £485m in net debt on the books.

Source: TradingView

The debt-to-equity ratio of 1.32 suggests the business shouldn’t have too much difficulty in paying off its creditors. Considering the airline had to increase its liabilities considerably to stay afloat during the pandemic, I’m encouraged by the firm’s progress.

Dividends

On the passive income front, it’s nice to see easyJet has resumed dividend payments. However, a yield below 1% means the stock is a shadow of its former self.

At some points in the past five years, easyJet shares were yielding above 9%. Unfortunately, I don’t see those glory days returning any time soon.

Source: TradingView

Nonetheless, Wizz Air doesn’t reward shareholders with dividends currently and IAG’s yield of 1.3% is only marginally better than easyJet’s.

Can the share price fly higher?

Overall, I’m optimistic about the prospects for further growth in the easyJet share price.

Granted, the stock faces risks. Margins are tight and expansion is difficult in a notoriously competitive industry. There’s also a risk of environmental taxes being levied on the company amid growing concern around climate change.

On the flip side, retaining a coveted FTSE 100 spot helps to maintain investor confidence. The airline’s post-Covid recovery remains intact and it has taken prudent steps to repair its balance sheet in recent years.

In addition, the package holidays division — launched in 2019 — has proved to be a huge success. It adds diversification to the business model and the board projects this arm will deliver £180m in pre-tax profit this year, which would represent an impressive 48% uplift.

I’ll continue to hold my easyJet shares for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in easyJet plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »