2023 has been a good year so far for investors in easyJet (LSE: EZJ). Since the beginning of January, easyJet shares have soared by 48%.
Despite that, they have still lost two thirds of their value over the past five years.
With the airline’s business showing a strong return to form in recent months, ought I add it to my portfolio soon in the hope of ongoing share price growth?
Booming demand
After a very difficult several years, the past 12 months have seen soaring demand for travel. That has helped business performance at a number of airlines, including easyJet.
In its interim results this month, easyJet pleased investors with news of improving business trends. Compared to the same six month period last year, capacity grew by 25%, passenger numbers were up 41%, and revenue soared 80%.
Not only that, the airline expects the boom times to continue. It forecasts its revenue per seat in the current quarter will be 20% higher than a year ago. But the headline cost per seat, excluding fuel, is expected to be flat. That should be good for profit margins.
By the following quarter, easyJet expects to get back to the level of capacity it had enjoyed before the pandemic. Thanks to higher prices though, I expect total revenues to surpass pre-pandemic levels easily.
Ongoing challenges
But if revenues are set to pass where they stood before the pandemic, why are easyJet shares still far below where they stood a few years ago?
Revenues are one thing, but what ultimately matters to most investors is profitability.
Despite boosting its schedule and selling a lot of tickets, easyJet made a headline pre-tax loss of £411m in the first half of its financial year. Not only is that roughly unchanged from last year’s position, it is a substantial loss.
One of the historic attractions to investing in easyJet was the airline’s strong balance sheet. Like its competitors however, the dramatic drop-off in demand during recent years combined with high fixed costs drained huge amounts of cash from the business. Although the company now has ample liquidity, thanks to £3.5 billion in cash and money market deposits, it also still has net debt of £0.2bn.
Valuing an airline
If the business continues to recover, I think it can become debt-free and it may even be able to reintroduce a dividend. But I do not expect the dividend to come back in the next year or two.
There are also risks to ongoing recovery. One is fuel costs, which can badly hurt profitability at an airline. I also fear a worsening economy could start to cut demand for leisure travel. That could be bad for revenues and profit margins at easyJet.
Given the risk profile, I do not think easyJet shares are an attractively-valued bargain for my portfolio.
The business remains lossmaking. It has worked hard to recover from pandemic lows, but that is a work in progress that could take some years. If there is continued good news, the shares may rise further from today’s level.
But, for now, I do not see the business as cheap given the risks involved. So I will not be investing.
