Shares of budget airline easyJet (LSE: EZJ) have been under pressure for the past year or so. From a high of close to 1,800p last summer, they’re currently trading nearer 1,000p.
Elsewhere in the Travel & Leisure sector, shares of small-cap City Pub Group (LSE: CPC) have held up rather better. They’re up a tad today, on the back of a trading update, and are little changed from this time last year.
Here, I’ll discuss whether I believe easyJet is now a FTSE 100 bargain, and whether City Pub Group could also have investment appeal.
Strong growth prospects
You may not have heard of City Pub Group, but its boardroom is packed with industry veterans. Indeed, several directors were behind a previous highly successful enterprise, Capital Pub Company, which they founded in 2000 and sold to Greene King, after a bidding war with Fullers, in 2011.
Capital Pub Company was focused on London, but the geographic footprint of City Pub Group extends beyond the capital, with — in addition to 17 London houses — pubs as far afield as Brighton, Exeter, Oxford and Norwich.
In today’s trading update, management reported “continued strong momentum” in the business, with sales for the 19 weeks to 12 May up 35% on last year. It said the company’s well placed to meet its expectations for the year as a whole, and to grow its current 45-site estate to 65-70 sites by mid-2021.
At a share price of 230p, the company’s market capitalisation is £141m, and it trades at 25.8 times current-year forecast earnings of 8.9p a share (up from 3.23p last year). The rating is a premium one, and the running dividend yield is a modest 2%.
I’m attracted by the group’s growth prospects, its strong, property-backed balance sheet, and its proven, high-quality management team. But I think the valuation is just a little too rich at present. As such, I rate the stock a ‘hold’.
Great opportunity for long-term investors
Budget airline easyJet may be a low-cost flyer, but it’s a top-notch operation, in my opinion. And the business is underpinned by — look away now Thomas Cook shareholders — a market-leading balance sheet.
Profits can be somewhat variable year-to-year, with things like fuel prices and exchange rates coming with the territory. But these things ebb and flow, and it’s the longer-term performance we should focus on.
I think this applies not only to the perennial variables, but also to a big one-off factor currently in play. Namely, as the company said in last week’s half-year results — reviewed by my colleague Peter Stephens — “the ongoing negative impact of Brexit-related market uncertainty.”
For the company’s current financial year (ending September), City analysts are forecasting a 3% decline in underlying earnings to 114.4p a share from last year’s 118.3p. And because the company’s policy is to pay a dividend of 50% of underlying earnings, we can also expect the dividend to drop to 57.2p from last year’s 58.6p.
At a current share price of 1,000p, you’re paying just 8.5 times forecast earnings, and getting a prospective 5.7% dividend yield. With City analysts forecasting a return to growth next year, and easyJet being well prepared for any Brexit outcome, I believe the current weakness in the shares represents a great opportunity for long-term investors to buy into a terrific business.
