Does the easyJet share price make the stock an unmissable bargain?

easyJet is more investable now than it was before its recent rights issue. But I’m also considering these further points before buying the stock.

| 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.

In some ways, buying easyJet (LSE: EZJ) shares below 500p back in the spring of 2020 seemed like a bit of a no-brainer. The pandemic had just struck the markets and the company’s share price collapsed.

One argument for buying went something like this. The pandemic is a temporary setback and when it’s over, the business will likely recover rapidly.

Enormous financial pressure

However, one troubling fact emerged that made me pause with my finger hovering over the buy button. Legendary investor Warren Buffett sold his airline stocks instead of doing his usual trick of buying during a crisis. And he ditched his investments because he had no idea what the industry would look like in the future.

To me, the implication was that Buffett expected the worst. He probably saw trouble ahead and a long and tortuous path out of the pandemic. And if he did think that, he’s proving to be correct.

The virus is resilient and hard to suppress. It’s been on the rise again just as the UK faces the approach of the colder months of the year. It seems clear the fight against Covid-19 remains ongoing.

Meanwhile, the easyJet business has been under enormous financial pressure. In July’s third-quarter update, the company said: “Cash burn during the quarter reduced to £55 million.”

To put that figure in perspective, the entire operating cash inflow in 2019 before the pandemic was around £192m. Indeed, this reduced cash-burn rate is huge.

But the business can’t carry on like this forever. And the reality of the financial distress justifies the ongoing weakness in the share price. As I write, it’s below 600p again and the speculative rises we’ve seen have proved to be unsustainable. In May, for example, the share price was above 800p. But a year ago it was near 400p.

Another blow for the easyJet share price

But the latest blow for the easyJet share price was a good thing for the underlying business. It came in the form of the recent rights issue that raised a much-needed £1.2bn, or so. And on top of that, the company has agreed to terms for more debt with a new four-year senior secured revolving credit facility, worth $400m.

Whichever way I look at it, my conclusion is the business has a hunger for cash. And feeding it now may help it to thrive in the future. Meanwhile, it’s natural for the share price to fall to accommodate the dilutive effect of the Rights Issue.

However, with its balance sheet shored up by the new money, the company reckons the future for the business looks brighter. Chief executive Johan Lundgren said the new capital will help easyJet to “take advantage of the strategic investment opportunities expected to arise as the European aviation industry emerges from the pandemic.”

And I reckon the stock is more investable now than it was before the rights issue. But the pandemic is just the most recent of many challenges facing the airline industry. And easyjet’s stock chart tells the story of the firm’s vulnerability to cyclical influences, with its many ups, downs, and sudden reversals.

Rather than seeing easyJet as an unmissable bargain, I see the stock as a low-grade opportunity. I reckon it’s possible for me to invest better elsewhere.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »