The easyJet (LSE:EZJ) share price is still down 63% from its pre-pandemic levels. But the underlying business has been quietly executing an almost miraculous recovery.
A strong performance in 2023 has left the company in a position to start paying a dividend again. So should investors consider buying the stock?
Recovery
The pandemic was particularly tough for airlines, which had to take on significant debt to stay out of bankruptcy. easyJet was no exception. But it’s recovery has been remarkable.
After falling 41% between 2018 and 2020, the company’s book value has recovered to within 16% of its pre-pandemic levels. And the firm now has more cash than debt on its balance sheet.
As a result, easyJet has reinstated its dividend, which had been suspended for the last few years. The company will pay out 4.5p per share at the start of 2024 and expects this to increase next year.
Even Lazarus would have to admit that easyJet’s comeback has been impressive. So with the share price still way off its pre-pandemic levels, is there a buying opportunity?
Dilution
easyJet has successfully deleveraged its balance sheet, which reduces the risk of rising interest rates. But investors should note this has come at a significant cost.
In order to raise cash, the company has had to increase its share count by 90% since 2019. That means shareholders have had to either buy more shares or face their stake in the firm decreasing.
The additional shares also make it harder for the easyJet share price to recover to its pre-Covid levels. In 2018, the company’s net income was £358m, equating to 90p in earnings per share.
With a higher share count, 90p per share would mean the business making £678m in net income. That’s much more difficult and makes it less likely the share price will reach its previous highs.
Are easyJet shares a bargain?
Right now, things look good for easyJet. The company is investing heavily in expanding its fleet of aircraft and the business has been enjoying strong demand since the end of the pandemic.
With shares trading at a price-to-earnings (P/E) ratio of 11, the stock looks like good value. But the airline industry is notoriously cyclical, so I’d be wary.
Businesses in this sector can find their profits fluctuate significantly at different points in time. I think there’s reason to believe that 2023 or maybe 2024 might mark a high point.
If travel demand falls due to a recession or geopolitical uncertainty, easyJet might well struggle to maintain its current earnings. And that will make today’s prices look much more expensive.
Is now the time to buy easyJet shares?
Warren Buffett is known for preaching caution when it comes to investing in the airline industry. And with easyJet shares, I’d be wary.
The company’s recovery has managed an almost biblical recovery, but 2023 has been an unusually good year. So I wouldn’t invest expecting it to maintain its current profitability.
With the stock up 41% since the start of the year, the share price looks like a fair reflection of the company’s prospects. And that means I think there are probably better bargains elsewhere.
