I’m looking at a number of FTSE 250 stocks I think are trading at bargain prices. While the index has regained its pre-pandemic level and gone on to make new all-time highs, not all stocks have participated.
Airline easyJet (LSE: EZJ) and bingo halls and casinos owner Rank Group (LSE: RNK) were both floored by pandemic lockdowns and restrictions. Their share prices are still languishing far below their pre-pandemic levels.
But I think they’re fundamentally sound businesses. And I reckon their discount prices make them great stocks for me to buy in August.
In easyJet’s last pre-pandemic trading year (to 30 September 2019), it made an underlying profit of £349m. In the weeks between a trading update on 21 January 2020 and the pandemic crash, the stock traded within a market-capitalisation range of between £5.51bn and £6.16bn. Put another way, between 15.8 and 17.7 times the profit.
Today, easyJet’s market capitalisation is just £3.88bn, or 11.1 times the profit of the last normal year’s trading. If the company were to get back to its pre-pandemic profit and the stock were to regain its pre-pandemic valuation, the upside would be between 42% and 59%. In terms of the share price, that’s between about £12 and £13.50, compared with the current £8.50.
Risks to a positive outcome
Earlier this month — the day after ‘Freedom Day’ — easyJet published a trading update for the three months to 30 June. The first thing I’m looking at with businesses like this is whether I think they can get through to a return to normality without going bust.
Virus variants and renewed restrictions or lockdowns remain risks. As such, I have to accept there are potential downside scenarios that could be damaging for my investment. Having said that, the company ended the period with access to £2.9bn of liquidity. With this headroom, I’m more than hopeful of a positive outcome. As such, this discount FTSE 250 stock looks very buyable for me.
The calendar year of 2019 was Rank’s last 12 months of normal trading. It made an underlying profit of £77m. Between its half-year results on 30 January 2020 and the pandemic crash, the stock traded within a market-capitalisation range of between £1.11bn and £1.27bn. Or between 14.4 and 16.5 times the profit.
Rank’s market capitalisation is currently just £0.79bn, or 10.3 times the profit of the last normal 12 months’ trading. If the company were to get back to its pre-pandemic profit and the stock were to regain its pre-pandemic valuation, the upside would be between 41% and 61%. In terms of the share price, between 237p and 271p, compared with the current 168p.
Risks but additional liquidity
As with easyJet, I have to accept there are downside scenarios that could adversely affect an investment in Rank. Again, the risks of virus variants and renewed restrictions or lockdowns feature prominently.
However, Rank has made two announcements this month that are positive for its liquidity. First, it’s agreed an additional £25m credit facility. Second, it’s won a favourable ruling on an £80m VAT refund claim. Industry watchers believe HMRC is unlikely to appeal. As such, this is another FTSE 250 stock I’d be happy to buy.