By the close of trading on 12 October 2023, easyJet (LSE:EZJ) shares were down 7%.
Investors didn’t react well to the airline’s unaudited results for the year ended 30 September 2023 (FY23) and its latest trading update.
The drop was particularly disappointing for me as I’d bought shares in the company two days earlier.
The stock had been on my radar for a while. And I took advantage of a 6% fall prompted by fears of rising fuel costs.
Think of the future
But as sad as I was to see such a reaction to the results, I think investing is all about the long term.
Short-term price fluctuations should be ignored, I feel. Easy to say, I know. However, over an extended period quality stocks should outperform the wider market.
Taking a closer look
Personally, I thought there was lots of good news in the press release. The company enjoyed its best ever summer with its holiday division doing particularly well.
When the 2023 results are finalised, easyJet is expecting a profit before tax of £440m-£460m. This will be its first annual profit since FY19 when, incidentally, the share price was more than double what it is now.
With more cash to spare, the airline has promised to restore the dividend with the intention of returning 10% of its post-tax earnings to shareholders this year.
Assuming a corporation tax rate of 25%, the company will allocate up to £34.5m for a payout. Based on the current number of shares in issue, this would equate to 4.55p a share.
However, a yield of 1% seems a little unimpressive. Perhaps conscious of this, the directors are proposing to double the return to 20% of profit after tax next year.
Further ahead
Crucially, the outlook for the airline sounds encouraging.
FY24 has started well with ticket yields up and load factors unchanged. And there’s additional capacity of 15%.
To cope with the anticipated extra demand and to help improve fuel efficiency and reduce costs, the company plans to purchase another 157 aircraft.
And the directors have set a medium-term target of achieving a profit before tax of £1bn.
Bailing out
So why did lots of investors decide to dump the stock?
The consensus among analysts was for pre-tax earnings of £469m. But I think wiping £230m off the market cap of easyJet seems a bit of an overreaction to possibly missing a profit target by only £9m.
Perhaps they have concerns about the rising price of jet fuel, which accounts for around 30% of operating costs. It’s currently around $950 per metric tonne but according to the International Air Transport Association, it’s still 12% cheaper than the average for 2022.
And the airline’s hedged 73% of its requirements for the first half of FY24 at $866, and 46% for the second half, at $822.
More likely, investors probably think the industry is too vulnerable to another pandemic or economic slowdown.
Whatever the reason, I’m not planning to sell.
As Warren Buffett once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.“
