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Are easyJet shares a good long-term investment?

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An easyJet plane takes off
Image source: London Luton Airport

Since I’ve no idea where share prices will go in the next week, or month, I always take more interest in the long-term prospects of a company. And, as a Foolish investor, I’m confident that the greatest spoils lie in buying right and holding on. Can I be assured of a great return when it comes to budget airline easyJet (LSE: EZJ) shares? Here’s my take.

easyJet shares: time to buy?

Arguably one of the best reasons for thinking easyJet shares might be worth buying right now is that it’s hard to imagine a worse time for airlines. The global pandemic has brought the industry to its knees. And while many of us can’t wait to travel and routes gradually open up, it’s clear that a full recovery will take longer than expected.

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On a positive note, all this is arguably already reflected in EZJ’s share price. Despite bouncing hard from its March 2020 lows, the stock’s still 20% or so lower than where it was five years ago. News of a rights issue has poured further salt on the wounds. If one subscribes to the Warren Buffett school of thought that it’s best to be “greedy when others are fearful”, now could be a perfect time to dive in.

The fact that easyJet has disclosed being on the receiving end of a takeover bid is, in some way, another reason to be bullish. It also doesn’t really surprise me. Despite its current woes, the company has a valuable brand and remains one of the biggest airlines in Europe. 

So what’s stopping me?

Perhaps the chief reason is that airlines make for horrible or, at best, unpredictable investments. Fundsmith Equity manager Terry Smith has long been a verbal critic of the industry, arguing that returns on capital are rarely above the cost of that capital. In other words, this is “a machine for losing money.

It’s not just the costs involved in keeping planes in the air. easyJet must also contend with cut-throat competition from rivals. That’s great for budget-conscious flyers, less so for investors keen to see their capital grow.

Even when they go bust, airlines are quickly re-capitalised short of their liabilities. This makes it hard for any company to truly pull ahead of the pack. On top of this, there are volatile fuel prices and unpredictable events (remember the Icelandic ash cloud in 2010?) to contend with.

Now compare all of this to a company like Diageo. Come rain or shine, I know sales of premium alcohol should remain relatively stable. I also know that the FTSE 100 giant owns a portfolio of immensely popular drinks that people won’t substitute for cheaper alternatives. I’ve never met anyone who refuses to fly with anyone other than easyJet. 

Worth buying?

Taking all of the above into account, I just can’t see the appeal of easyJet shares today. While I don’t doubt it has the potential to recover strongly in time, there are far too many remaining headwinds to make this a compelling buy for my portfolio. And — plot twist ahoy — this is coming from someone who once held the stock, albeit many years ago!

That revelation either makes me a hypocrite or an investor whose stock-picking has evolved (and improved) over time. I’d like to think it’s the latter.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

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