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Why the easyJet stock may be a great buy now

The easyJet (LSE: EZJ) share price has fallen almost 10% in the past week. This is understandable considering that stock markets have been diffident recently. In the past couple of months, the FTSE 100 index has lost almost 2% of its value, and the FTSE 250 index, of which easyJet is a part, has lost around 5.5% of its value. 

Flying in stormy weather

On the one hand this is because of still existing uncertainty about the pandemic. Travel is still not back to where it was before Covid-19. And the likes of airlines stocks continue to be impacted by this. On the other hand, there are fears about the recovery. Policy stimulus is now being withdrawn. In China, the near-collapse of property developer Evergrande has been instructive, considering China’s was the first economy to slump and also the first one to ride out of it. And rising prices, especially fuel prices are making travel less viable as well. 

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Upbeat trading update

Still, I would have expected the easyJet share price to show some pickup today after its trading update. For the year ending 30 September, it expects its annual loss to be below the consensus estimate. The final quarter of the year, which covers the summer months, has been particularly positive. 

Losses during this time have halved and easyJet has generated positive cash flow, as it flew 58% of its financial year (FY) 2019 capacity. It also expects the momentum to continue, as bookings remain robust. In the first quarter of the current financial year, its capacity is expected to be at 70% of its FY 2019 levels.

Why is its share price down?

Yet, investors are not happy. Its share price is down more than 3% as I write this afternoon, making it among the top 10 FTSE 250 losers in today’s trading. It is likely that its share price is still dealing with the after-effects of its recent rights issue, which diluted the value per share. It saw a big fall following the news of the issue and has only recovered partially since. 

What I’ll do

I bought easyJet shares a while ago and even participated in the rights issue. It has been a turbulent ride, to use aviation terminology. But I think that this might be the time to load up on more of the stock. Things are looking up for the airline. At the same time, its share price is still lower than what would be expected even after a dilution since its rights issue. So, I think that there is a case for it to move up from here. 

Of course, there are still doubts about the recovery. This is particularly because higher fuel prices will result in one of two outcomes. Either airlines will absorb higher prices and increase their losses or they will pass on cost increases and risk lower travel demand.

Still, I think that on the whole I am still inclined towards it. If I did not already own the stock, I maintain that I would buy some today. But since I do, I can wait for its detailed results in November to get a better sense of how well it is managing risks, just to be sure. 

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Manika Premsingh owns shares of easyJet. 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.

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