FTSE 250 airline easyJet (LSE:EZJ) has seen its share price take flight again recently. At 487p per share, the budget flyer is now 25% more expensive than it was three months ago.
Yet today it still trades at a whopping discount to the £14.90 that its shares were valued at before the pandemic four years ago. So should I buy easyJet shares in anticipation of further meaty price gains?
Flying high
The Luton company is one of many major airlines to capitalise on the industry’s solid recovery following the pandemic.
The 82.8m passengers it flew during the last financial year (to September 2023) was up sharply from 69.7m a year earlier as it ratcheted up capacity. It now has its all-time high of 96.1m, punched before Covid-19, in its sights.
Mark Crouch of eToro has suggested that “easyJet’s final results suggest [the pandemic] is ancient history now“. Given the record profits the firm recorded in the second half, this bullishness can be easily explained.
It helped the airline swing to a pre-tax profit of £455m for the full year from a loss of £178m in the prior 12 months.
Further to go?
So how high can easyJet’s share price go? Well City analysts don’t think it will get anywhere close to pre-pandemic peaks around £15 in the near future.
Today the airline has an average price target of 646p per share. That’s based on predictions from 19 analysts who have rated the stock.
However, this doesn’t suggest that there’s anything fundamentally wrong with the FTSE 250 firm. It simply reflects the mass dilution of easyJet shares as the business raised cash to stay afloat.
The number of outstanding shares currently stands at 753.1m, up sharply from 397m just before the pandemic.
Trouble ahead
If brokers’ price targets prove accurate, I could secure a 33% return on my cash by buying shares today. And that’s excluding the boost provided by any future dividend payments (the business re-instated its payout policy last year).
But those attractive share prices suggest that trading conditions will remain extremely favourable. My concern is that the airline faces severe obstacles that could see its recovery run out of steam.
For one, companies across the travel and leisure sector — even those that operate at the value end of the market — could see revenues cool sharply. Economic conditions remain extremely difficult across easyJet’s European markets. A broad uptick in inflation more recently adds further reason for caution, too.
Rising tensions in the Middle East present an additional significant threat. Not only could this push fuel costs through the roof if crude prices rally on supply fears. Airlines may also be forced to shutter more routes (it has already stopped flights to Israel in recent weeks).
Finally, the company must also overcome high levels of competition, an age-old problem in the airline industry. Just this week Ryanair announced a major expansion of its London operations for the summer season.
Searching for other shares
Today easyJet shares trade on a forward price-to-earnings (P/E) ratio of 8.9 times. It’s a rock-bottom valuation that reflects the significant risks it faces from now on.
All things considered, I’d rather search for other UK stocks to buy right now.
