Although some investors — most notably star fund manager Terry Smith — avoid this industry like the plague, many others in the market are attracted to owning slices of airlines. Or at least they were.
Budget carrier easyJet (LSE: EZJ) has been hit hard by a perfect storm of strong competition for flyers’ money, a rise in the price of oil, and the obligatory Brexit-related uncertainty. Isolated incidents, such as the problems caused by a drone at Gatwick back in December have only added to investors’ concerns and hit the share price.
Having halved in value since last May, the business is now likely to be removed from the FTSE 100 when the outcome of the index’s quarterly reshuffle is officially confirmed next week. Fellow struggler Marks & Spencer will surely join the airline in being demoted to the FTSE 250.
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Given that many index trackers committed to following the FTSE 100 will automatically be selling their positions in the company following its demotion, this has the potential to drag the share price even lower.
But, of course, those investing with the Foolish philosophy of buying quality companies for the long term shouldn’t necessarily let this put them off grabbing a slice of easyJet… eventually. After all, the shares could rocket if our EU departure were to be spectacularly cancelled later down the line.
The question is, if you were committed to buying stock in a budget airline, should it be easyJet or perhaps rival Wizz Air (LSE: WIZZ)?
The latter’s share price, while not immune to volatility over the last six months, has actually gone in the opposite direction.
“Very optimistic”
Releasing full-year figures to the market this morning, the largest operator in Central and Eastern Europe reported a 16.7% rise in passenger numbers to a record 34.6m in the 12 months to the end of March.
In addition to this, revenue jumped by almost 20% to €2.32bn and net profit increased 6% to €292m — quite a result when you consider the ongoing problems within the industry. It’s also a world away from the half-year £272m pre-tax loss recently reported by easyJet.
Focusing on FY2020, CEO József Váradi said the company remained “very optimistic“, believing higher fuel prices would hit smaller airlines and allow Wizz to increase market share.
The company is now predicting a 17% rise in passenger numbers to 40m and net profit in the range of €320m-€350m. Understandably, however, Wizz did caution that it only has “limited visibility” on this.
Indeed, with ongoing air traffic control issues likely to continue, the mid-cap “anticipates another very challenging operating environment in FY20” — a comment which may go some way to explaining why shares were over 5% down in early trading.
I’ve been bullish on Wizz for some time now, even if a lack of dividends means it won’t be one for income investors.
At 13 times forecast earnings, the stock is more expensive than easyJet (10) and Ryanair (12), but today’s numbers arguably help justify this premium. Its balance sheet is strong(er) with cash of €1.32bn on the books at the end of March — a 34% improvement on 2017/18.
I suspect cyclical stocks like airlines are likely to experience further volatility going forward, at least until the situation surrounding Brexit is clarified once and for all. Notwithstanding, I’m confident Wizz’s shares will fly higher in time.
