Why the easyJet share price could continue to soar higher than the FTSE 100

After a Q3 trading update, easyJet plc (LON:EZJ) can continue to outperform the FTSE 100 (INDEXFTSE:UKX) says G A Chester.

| 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.

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.

The easyJet (LSE: EZJ) share price opened 3.4% higher this morning after management upped its full-year profit guidance in a Q3 trading update. Following a “strong performance” in the quarter, the FTSE 100 firm said it now expects headline profit before tax for its financial year ending 30 September to be between £550m and £590m. This compares with previous guidance of £530m to £580m.

Over the past 12 months, easyJet has delivered an 18.4% total return for investors, soaring way above the 7.2% posted by the FTSE 100. Furthermore, its long-term performance has been just as impressive, averaging 19.6% annually over the last decade compared with the index’s 7.7%.

I believe easyJet and another outperforming firm in the travel sector offer good value at current levels. As such, I’d be happy to buy a stake in both businesses on the basis that I see them continuing to fly higher than the wider market.

From strength to strength

easyJet said its strong Q3 performance came on the back of “robust consumer demand” and “a benign competitor environment, with unfilled Monarch capacity and challenges for competitors in France.” This helped the company increase Q3 revenue by 14%, while the upgrade to full-year headline profit guidance came despite some industry-wide headwinds in costs, European industrial action and severe weather.

Such challenges tend to wax and wane, but the key thing is that easyJet goes from strength to strength. It continues to have plenty of scope for growth, as demonstrated by its move to introduce higher-capacity (lower-cost) planes on its most popular routes and its rapid expansion at Berlin Tegel airport, following the acquisition of parts of insolvent Air Berlin.

I see little risk from a new chief executive, following Carolyn McCall’s move to ITV after over eight year’s at easyJet. New boss Johan Lundgren is a travel sector veteran, latterly as group deputy chief executive at TUI. I reckon today’s profit upgrade at the midpoint will translate into earnings per share (EPS) of around 117p. At a share price of 1,700p, this gives a price-to-earnings (P/E) ratio of 14.5. Add in a prospective dividend yield of 3.3% and sector-leading balance sheet strength (£655m net cash at the last half-year end) and this is a stock I’d be happy to board.

Continuing positive performance

Meanwhile on terra firma, National Express (LSE: NEX) is another travel stock I’ve been keen on for a while and where I continue to see value. The road has been a profitable one for investors since Dean Finch took the driving seat in 2010. The annual total return over the last five years has averaged 13.7% compared with 7% from the FTSE 100. Over the past 12 months, the returns have been 14.9% versus 7.2%.

The provider of bus and coach services in the UK, North America, Spain and Morocco (and rail services in Germany) earned more than 80% of its operating profit from overseas in its last financial year. This helped it post an 11% increase in underlying EPS. It reported a “positive performance across all divisions” for the first four months of the current year at its AGM in May and analysts are forecasting another 11% rise in EPS (to 32.25p) for the full year. At a share price of 407p, I see great value here with a P/E of 12.6 and prospective dividend yield of 3.7%.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »