In recent weeks the easyJet (LSE: EZJ) share price has threatened to take off. Along with IAG and Rolls-Royce, the so-called recovery stocks have bounced back a bit. They’ve been boosted by news of a surge in holiday bookings, changes to the UK’s traffic light system for border control and continued optimism that Covid vaccines are working and new variants are being contained.
So undoubtedly there’s some recovery potential. but the major question though be: is that a good enough reason to invest in easyJet?
The bulls, those who think the shares will do well, would argue it’s well financed given the recent rights issue. That’s set to raise over. Not bad! Alongside an increase in demand for overseas holidays, it could be argued that things are looking up for the airline.
Its lower-cost model may also be attractive to cash-strapped families who feel they need a break post-pandemic and are willing to spend on a foreign holiday.
The bear case
However, despite the arguments of the bulls, I fall into the bear camp and there are a number of reasons why I think the easyJet share price could fall. The dilution caused by the latest rights issue means earnings per share will likely be lower for a long time as each share will account for less of the earnings. Put another way, each investor has a smaller slice of the pie per share owned.
Alongside an increase in debt to over £2bn, I think the rights issue means it will be many years until easyJet resembles the company it was pre-pandemic.
Its negative cash flow and losses also mean that any dividend is probably a way off. So buying the shares now is purely about share price growth, with no income to compensate if that growth doesn’t materialise.
And in the short term, the rising price of oil is going to put even more pressure on the airline’s profit and loss account. A major cost increase is the last thing the embattled business needs right now.
The recovery in the share price is based mainly, in my view, on optimism around the recovery. That’s fine, but on the fundamentals, I just don’t think the share price looks good value.
The easyJet share price longer term
If in the short term the stock market is a voting machine and in the long term a weighing machine (I paraphrase Benjamin Graham who mentored Warren Buffett), then of course the easyJet share price could keep flying up. Longer term though, the question remains: do airlines and easyJet specifically make for good investments?
For me, the resounding answer is no. In the long run, I don’t see why investing in easyJet would be more profitable than holding a UK share that has better income and growth potential – of which I think there are many.
Andy Ross owns no share 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.