Shares in budget airline easyJet (LSE: EZJ) have experienced a dramatic fall recently. Since mid-February, the EZJ share price has fallen from above 700p to around 360p – a decline of nearly 50%.
Here, I’m going to discuss whether this share price fall has presented an attractive buying opportunity. Is now the time to buy easyJet shares for my portfolio?
Should I snap up easyJet shares today?
Let’s start with some reasons to be optimistic here.
One clear positive is that demand for flights remains high, thanks to the ‘revenge travel’ trend – where people are trying to make up for the trips they missed out on during Covid.
This is illustrated by easyJet’s near-term bookings. In a recent business update, the company said that demand for travel this summer remains “strong”, with 86% of tickets sold for Q3 2022 and 48% sold for Q4. The latter figure is broadly in line with booking levels at the same point in FY2019.
Another positive is that easyJet is forecast to return to profit next financial year (ending 30 September 2023). Currently, analysts expect the group to generate a net profit of £290m and earnings per share (EPS) of 38.5p. That EPS forecast puts the stock on a fairly undemanding forward-looking P/E ratio of about 10.
Risks that could hit the share price
Moving on to the risks, however, there are a number of things that concern me here.
My main issue is in relation to the operational problems that European airlines are experiencing right now. At the moment, easyJet and its rivals are in a state of chaos, with hundreds of flights being cancelled every week.
One of the key problems is staff shortages across the industry. During Covid, a lot of people in airline jobs left the industry. Some went to work for companies that were not impacted negatively by the pandemic (like Amazon) while others turned to the gig economy. Lots retired. Now the workers are slow to return. Brexit is compounding the problem. I don’t expect this issue to resolve itself overnight. And I’m not the only one who thinks that. Analysts at JP Morgan believe these problems could last 12 to 18 months. Clearly, this is going to have a significant impact on revenues and profits.
It’s worth noting that analysts are currently slashing their earnings estimates for easyJet. Over the last month, for example, the consensus EPS forecast for this year has fallen by 12.7p to -1.7p. Meanwhile, they’re also slashing their share price targets. On 1 July, for instance, Citigroup cut its price target to 360p from 475p. That implies no share price upside from current levels.
Rising costs are another issue I’m concerned about. Not only does easyJet potentially face higher fuel costs but it also faces higher wage costs and airport charges. These higher costs could hit profits and the share price.
Finally, the cost-of-living crisis is another major risk here. Right now, consumers have money to travel because they saved during Covid. And they’re prepared to pay higher ticket prices. This could change next year as savings run out.
easyJet shares: my move now
Given these risks, I think the best move is to leave easyJet shares on my watchlist for now. All things considered, I think there are safer stocks to buy.
