I first invested in easyJet (LSE: EZJ) in October 2020. A few months ago, my investment had doubled in value – and that was in the middle of a lockdown! The stock is actually up almost 48% year-on-year and at the time of writing, I’m still 63% up and about to buy more easyJet shares.
While there are still reasons to be cautious, here’s why I’m investing.
easyJet shares: ready for take-off?
I see plenty of reasons to feel easyJet shares still have growth potential. The most obvious is the simple fact that the company hasn’t yet resumed normal service. While nothing is guaranteed, it’s likely that whenever the aviation industry returns to ‘normal’, its share price will benefit.
Additionally, in Q2 2021, the company reported a 2,866% revenue increase year-on-year. This isn’t exactly a surprise, but it is proof that demand for air travel is there. When capacity is able to increase (it was operating at 17% of Q3 2019 capacity), this should be reflected in revenue.
I’m also expecting easyJet shares to benefit from Britons trying to make up for lost time. If pandemic progress remains positive, we’ll likely see an explosion of summer holidays in 2022. This could make its current £8 share price seem incredibly cheap.
My colleague G A Chester is also feeling positive about easyJet shares. He views a share price of at least £12 as very attainable. Assuming the company can work its way back towards its pre-pandemic profits and valuation, that is. This would be growth of at least 40%.
The company also has access to liquidity of almost $3bn. This is a comforting thought when faced with a variety of potentially very sudden upsets.
But it could still crash
Having said all of the above, there are always risks to be aware of. With new Covid-19 developments around every corner, many of easyJet’s goals could be ruined by new travel restrictions. This includes the all-important capacity issue.
The company has projected a capacity of up to 60% of Q4 2019’s level for Q4 2021, and profits of $240m are forecast for 2022. However, if Scott Kirby (United Airlines CEO) is right in his prediction that the aviation industry won’t be operating at pre-pandemic levels until 2024, then easyJet shares might not hit pre-Covid levels for a long time.
The pandemic also hit easyJet’s debt hard. In March 2021, the company owed around £2bn, which was four times more than a year earlier. It has been cutting costs successfully, but it remains to be seen how it will tackle this debt, and how further Covid-19 developments could impact it.
Royston Wild also pointed out another issue the company faces: rising fuel costs. Brent oil prices have risen by 77% in the last year, which means that a company very conscious of its spending will be paying a lot more than usual for its fuel.
While these downsides are making sure I’m not expecting fireworks from the company in the short term, I’m very optimistic about easyJet shares in the long term. I’ll be buying more.
