Last week, easyJet (LSE:EJZ) shares tumbled to under 300p and reached a low of 280p on 28 September. Given the share price was over double that a year ago, is the stock below fair value and should I add it to my portfolio?
The travel sector
The travel sector as a whole has improved remarkably since the start of the pandemic. Demand has increased as the ‘revenge travel’ trend means people are making up for lost trips.
Budget travel sector growth is also presenting companies with a wealth of opportunities. This is especially true for easyJet, as it is one of the industry’s leading players.
In a business update, easyJet reported that summer travel was “strong” and the company has sold 86% of tickets for Q3 2022.
Despite these positive numbers, easyJet still made a pre-tax loss of £114m in Q3. The company also cancelled 10,000 flights across the summer months due to staff shortages, an ongoing problem.
A potential dividend stock
Another factor I’m considering is the company’s dividend. easyJet isn’t exactly known for its sustainable dividend – it cut payouts in 2019 due to higher fuel prices before axing them altogether during the pandemic – but this may change. The business expects to bring back a dividend for shareholders next autumn at 4.5p per share, representing a 1.5% dividend yield.
Even if dividends grow in the future as the airline industry recovers, I think it would take several years for the yield to be higher than the FTSE 100 average of 4%. Therefore, I am unlikely to consider investing in the stock for passive income alone.
easyJet’s future
I see two problems for easyjet right now.
Firstly, inflation is pushing up costs for the airline and profit levels are impacted as a result. Costs are also increasing as fuel becomes more expensive due to the war in Ukraine.
Secondly, the rising cost of living is likely to impact the travel industry. As people have less money to spend on non essential goods, easyJet ticket sales could slow down.
The current share price does mean easyJet looks impressively cheap. It has a price-to-earnings (P/E) ratio of 12, far lower than competitors such as Wizz Air, which has a 74.46 P/E ratio.
Forecasts also show that easyJet will return to profit by next year. The company is expected to generate earnings per share of 38.5p and a net profit of £290m.
Will I be investing?
Whilst the current share price is tempting and growth opportunities seem plenty, I don’t think easyJet’s future is plain sailing. Rising costs for the company are impacting profit and, as the cost of living worsens, I’m not convinced travel demand will continue to grow at the same levels.
That’s why I won’t be adding easyJet shares to my portfolio right now.
