easyJet (LSE: EZJ) published another impressive set of earnings this morning, confirming the airline — in my view — as the pick of the UK airlines for investors.
The low-cost carrier’s share price has now risen by 282% over the last three years, suggesting that growth is likely to slow, but I believe that 2015 could be another good year for easyJet investors, as I’ll explain in this article.
1. Beating expectations
Today’s results narrowly beat consensus forecasts: earnings per share rose by 13% to 114.5p (forecast: 114.1p), while easyJet’s dividend jumped 35% to 45.4p, beating expectations for a payout of 43.7p per share.
A 21% rise in pre-tax profits to £581m would have triggered a decent dividend increase anyway, but today’s bumper increase was helped by a move to a more generous dividend policy that will see the airline pay shareholders 40% of post-tax profits, up from a previous payout ratio of 33%.
easyJet’s ability to provide clear guidance and deliver on it is a big attraction, suggesting strong management.
2. Improved profitability
When a fast-growing company reports rising profits, this sometimes masks a fall in underlying profit margins.
However, easyJet kept costs tightly under control last year, delivering sustainable savings of £32m. This helped to lift the firm’s pre-tax profit margin from 11.2% to an impressive 12.8% — significantly higher than International Consolidated Airlines Group, at 6.3%.
Like most airlines, easyJet hedges the majority of its fuel purchases. The firm’s current hedging suggests that fuel costs per tonne should fall modestly over the next two years, which should help support profits, without sacrificing growth.
3. Still affordable
There’s no doubt in my mind that easyJet must be approaching the end of its meteoric growth phase, but despite this, the airline’s shares don’t look expensive.
Trading on a 2015 forecast P/E of 12 and with a 2015 prospective yield of 3.2%, the shares are valued in-line with the FTSE 100.
My view is that the shares remain a buy — with the proviso that shareholders should remember revenue growth was only 6% this year, and profit growth will — perhaps soon — fall to a similar level. I believe this makes the shares increasingly attractive from an income perspective, but perhaps less attractive for dedicated growth investors.
A growth alternative?
easyJet’s smaller peer Flybe Group (LSE: FLYB) has been hotly tipped by some as one of this year’s most exciting turnaround opportunities.
This small airline boasts ex-easyJet management, and currently trades on a 2015 forecast P/E of just 8.5 — suggesting that a major re-rating could be possible, if the airline hits its targets: unlike easyJet, Flybe shares could double.