Shares in airline and package holiday group Jet2 (LSE: JET2) have risen 65% over the last five years. This share price performance is a big contrast to that of rivals easyJet, TUI and IAG. All of these companies have seen their share prices fall by 60%, or more, over the same period.
Jet2’s market-beating performance helps explain why it’s my top travel pick from the UK market.
Of course, there’s more to finding good investments than simply looking for companies with a rising share price. My pre-flight checklist always includes good management, a healthy balance sheet, clear strategy and strong cash generation.
I reckon Jet2 scores well on all counts — and I don’t think the shares look expensive at current levels. Here’s why I see this £2bn firm as a buy for 2023.
Why I’d buy Jet2
To be honest, I don’t usually buy airline stocks. They have massive fixed costs and they’re heavily exposed to oil prices. They’re also vulnerable in a recession — if travellers stay home, aircraft still have to be paid for.
However, Jet2’s focus on leisure travel and its package holiday business have helped the group overcome this weakness. Between 2013 and 2019, the group’s annual sales rose from £869m to £2964m. Profits also jumped from £31m to £137m.
Jet2’s first post-pandemic results suggest to me that this well-run business has picked up where it left off in 2019. During the six months to 30 September 2022, revenue rose to £3,568m, while profits rose to £356m. Both figures were at least 25% higher than the equivalent period in 2019.
The business has other attractions for me too. Executive chairman Phillip Meeson has run the business since 1983 and has an 18% shareholding.
I’m a fan of owner-managed companies. I find they often perform well as long-term investments, because management is focused on sustainable growth, rather than quick fixes.
Is it the right time to buy?
I think this business is well run and is relatively unlikely to mess things up internally. But I can’t ignore the wider economic backdrop and the risk of external problems.
The UK seems likely to suffer a recession — or at least a slowdown — over the coming year. That could hit consumer spending. Big ticket items like holidays are more likely to be sacrificed than, say, coffee and sausage rolls from Greggs.
Disruption at airports is also a risk. The problems last summer cost Jet2 more than £50m in compensation and delays.
The latest broker forecasts suggest the group’s profits will be flat this year before returning to growth in 2024. A recovery might take longer than expected, but this seems a reasonable estimate to me.
At current levels, Jet2 shares are priced at 10 times forecast earnings. I think that could be a good starting point for an investment, based on the group’s track record of growth.
