easyJet (LSE: EZJ) aircraft may still be stuck on the runway, but easyJet’s share price has just risen by almost 50% in three weeks.
You don’t need me to tell you that the this sudden surge upwards was triggered by news that we could have a Covid-19 vaccine by the end of the year.
There are still no guarantees. But in my view, the stock market can now see a way out of the pandemic and is pricing shares accordingly. I thought easyJet shares had recovery potential at a price of 500p. But with the stock now trading at more than 730p, I’ve been taking a fresh look.
Will flying surge after lockdown?
Although easyJet expects to fly “no more than 20%” of the flights planned for the final three months of 2020, chief executive Johan Lundgren believes demand for flights could surge when travel restrictions are lifted.
He says that after quarantine restrictions for the Canary Islands were lifted in October, sales rose by 900%. The airline was able to add an extra 180,000 seats of capacity within 24 hours to capture this demand.
You’d expect Mr Lundgren to be optimistic, of course. But in general, I think he’s right. This year many people will have saved money by not taking holidays, travelling to work, or eating out. I think there probably will be some pent-up demand. I’m confident people will still want to fly, especially to popular short-haul holiday destinations.
However, I think there’s also a real possibility that this potential demand is already reflected in the easyJet share price.
What could go wrong?
A vaccine could speed up airlines’ return to the skies. But I don’t think we can ignore the economic damage, rising unemployment and risk of recession that could follow the pandemic.
Given the lower demand for flights, some airlines may still have spare capacity. I think this could result in competition for passengers, resulting in lower ticket prices.
Overall, I don’t expect airline profits to bounce back to 2019 levels for several years. That means I need to think carefully about easyJet shares. Is the stock already priced for a recovery?
easyJet share price: high enough?
Between 2017 and 2019, easyJet’s annual profit averaged £335m. With the easyJet share price at about 735p, that would put the shares on a price/earnings ratio of about 10.
That seems reasonable enough, but analysts’ forecasts suggest the airline could report a loss of more than £200m in the 2020/21 financial year. Building profits back to £300m+ could take several years. Management will also need to divert cash to repay some of the extra debt that’s been taken on to survive. This could limit the airline’s ability to pay dividends.
Even if easyJet’s profits bounce back, I wouldn’t want to assign a high valuation to this business. Air travel is a competitive market. As we’ve seen this year, airlines’ high fixed costs mean that they suffer badly when demand is disrupted.
On balance, I’ve decided that easyJet’s share price is a little too high for me to buy right now. I suspect that if I’m patient, I’ll find a better buying opportunity in the coming months.
