Potentially 84% undervalued, is this FTSE 250 company a screaming buy?

Plenty of companies still haven’t found their footing after the pandemic, but is this FTSE 250 airline now in bargain territory? Gordon Best takes a look.

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Wizz Air (LSE:WIZZ) , the low-cost airline, has shown a remarkable capacity for resilience in a difficult market. Despite an environment marked by high fuel prices and airport capacity issues, the FTSE 250 company is charting a course towards sustained profitability.

So, with heavy declines in the share price over the last year, is the company now in bargain territory?

A turnaround story?

Wizz Air’s financial journey over the past year has been a tale of overcoming adversity. For the 12 months leading up to March 31, 2023, the airline reported a net loss of €535.1m, an improvement from previous years’ performances​​. However, this period of loss was followed by a notable turnaround in the next quarter, where Wizz Air posted a profit of €61.1m, a significant leap from the €452.5m loss in the corresponding period of the previous year​​.

Management has shown confidence in the company’s future financial health. Expectations are high, with a forecasted net profit of between €350m and €450m in the next financial year.​

Wizz Air’s recent financial year, was marked by strong growth. Revenue more than doubled to €3.90bn from €1.66bn, and the pre-tax loss narrowed significantly, showcasing the airline’s robust revenue-generating capacity despite external challenges​​.

Aggressive growth

Wizz Air’s market strategy has been characterised by an aggressive focus on building a competitive edge. As of March 2023, it had 179 aircraft in its fleet. In Central Europe, the company is a key player, holding a 24% market share, rising to 41.6% among low-cost carriers​​.

The airline plans to grow its fleet to over 200 aircraft by next year and aims for 500 by 2030, signalling confidence in its long-term growth trajectory​​.

An undervalued gem?

Wizz Air shares are currently a bargain according to a couple of my favourite metrics. A discounted cash flow calculation suggests that shares may be 84% below fair value. Of those I’ve seen in the FTSE 250, this is one of the most potentially undervalued. Furthermore, the price-to-earnings (P/E) ratio of 7.6 times is well below the average of the sector at 8.5 times.

Estimated growth is forecast at over 30% over the coming years, far outpacing the 9.0% growth forecast for the European Airlines industry​​. Seemingly, this looks like a company moving in the right direction, even if the share price isn’t.

The likely reason for this disconnect is the debt situation. Its huge €5.6bn of debt far outweighs the €225m in equity. Therefore, with interest rates currently high, the gamble to grow quickly needs to be successful.

Is it a buy?

Wizz Air’s journey in recent years captures the challenges and opportunities inherent in the aviation industry. From weathering financial losses to positioning itself for significant future profits, the airline shows remarkable resilience. Its focus on growth and market penetration sets it apart as a formidable player in the sector.

All of the above make Wizz Air a FTSE 250 stock to watch in my opinion. I’ll be starting a small position at the next opportunity, and keeping a close eye on how its strategy progresses.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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