When easyJet (LSE: EZJ) joined the FTSE 100 in March 2013, its promotion came after a period of rapid growth. But the budget airline has continued to expand. easyJet’s share price has risen by 25% over the last year, helped by upgraded profit guidance.
Today I’m going to explain why I continue to hold easyJet shares in my own portfolio. But first I want to look at the latest numbers from another stock I own myself, FTSE 250 instrumentation and control manufacturer Spectris (LSE: SXS).
Next six months are vital
Its selling point is that the equipment it makes is designed to help make its customers operations more efficient and productive. The group’s performance during the first half of the year seems to have been reasonably good. Sales rose by 3% to £728m, while operating profit climbed 6% to £70.5m.
Three out of the group’s four divisions reported sales growth during the half year, with sales up by 5% in North America, and by 6% in Europe and Asia.
However, this positive performance wasn’t enough to distract investors from the cautious outlook statement in today’s results. Although profit guidance for the full year is unchanged, chief executive John O’Higgins does expect to see sales growth “ease a little in the second half” when compared to last year’s strong performance.
Should I be worried?
Spectris earnings are always heavily weighted to the second half of the financial year. Last year, for example, H2 earnings were more than double the H1 figure. On this basis, 2018 forecasts for earnings of 158p per share seem reasonable, based on the group’s half-year adjusted earnings of 46.1p per share.
However, the combination of Mr O’Higgins planning to leave the business and the cautious tone of today’s announcement makes me slightly hesitant about the future. With the shares trading on 15.4 times forecast earnings and offering a forward yield of 2.5%, I’d rate this stock as a hold at current levels.
Flying higher
It would be easy to say that easyJet has reached maturity and cannot grow much bigger. But the facts suggest otherwise. The airline has been picking up demand left behind by the failure of smaller airlines such as Monarch. Total revenue climbed 14% to £1.6bn during the third quarter, as passenger numbers rose by 9.3% to 24.4m.
During the same period, the airline’s capacity rose by 8.9% to 26.2m seats. As passenger numbers grew faster than capacity, we can see that easyJet’s load factor — the percentage of seats sold — rose again, to 93.4%.
A high load factor helps to improve profit margins. But to maximise the profitability of each passenger, easyJet is also focusing on increasing non-fare revenue. This so-called ancillary revenue rose by 11.5% per seat during the third quarter, as more passengers chose optional extras such as reserved seats and upgraded baggage allowances.
I’m still a buyer
My analysis of easyJet’s latest accounts suggests that its debt and leasing obligations are lower than some rivals, relative to its profits. This low gearing should provide useful downside protection if the market does slow.
In the meantime, I believe the shares offer one of the most attractive dividend growth opportunities in the FTSE 100. Despite forecast earnings and dividend growth of more than 30% this year, the stock trades on a forecast P/E of 14 and offers a prospective yield of 3.5%. I rate the shares as a buy.
