The past year has seen easyJet (LSE: EZJ) report strong demand and bring back its dividend. Over 12 months, the easyJet share price has grown 28%.
Where might things go from here – and should I invest?
Strong performance and robust demand
At the interim results stage in May, easyJet reported good news on customer demand.
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Passenger numbers were up 11% compared to the same period the prior year. Revenue jumped 23% to £3.3bn. Meanwhile, headline costs (that is, costs excluding one-offs) grew more slowly, by 17%.
Still, there was a headline loss before tax of £350m. That is substantial, especially given that the company that has a market capitalisation of less than £4bn.
Summer is the peak season for airlines like easyJet and the company expected a strong season to boost earnings strongly. Last year’s net income came in at £324m. That means that the current price-to-earnings (P/E) ratio is 11. If the company delivers on its expected earnings growth then the prospective P/E ratio will be lower still.
Since the interim results, a further quarterly trading statement showed strong passenger numbers and improved headline profit compared to the same quarter last year. On top of that, the formerly indebted company reported a net cash position at the end of the first half.
easyJet shares don’t look expensive to me
Given the airline’s recent performance, I do not think the easyJet share price is high. If the business keeps performing well, I reckon it could go higher.
It has a strong brand and proven business model. It has net cash and expects to be profitable this year. The valuation relative to earnings looks cheap – and the dividend has been brought back.
Still, I am not tempted to buy. If I had invested £1,000 in easyJet shares five years ago, my holding would now be worth a little less than £480, even after the strong performance over the past 12 months. On top of that, having bought when the business was paying a regular dividend, I would then have seen those passive income streams dry up unexpectedly for a number of years.
Past performance is not necessarily indicative of what will happen next in the stock market. But the reasons for easyJet’s performance over the past five years reflect ongoing risks I see in the aviation industry.
Demand is hard to predict. It can be affected by a weak economy and decimated by events outside a carrier’s control, from health-related travel restrictions to a terrorist attack.
That is not an attractive business model to me. I do not think the current easyJet share price, cheap though it seems, offers me a sufficient margin of safety as an investor should some of those risks come to pass, as I expect they will at some point in the coming years (though potentially not for a long time). So, I have no plans to buy.
