Over the past five years, the easyJet (LSE: EZJ) share price has almost halved in value. The pandemic was the primary driver behind this fall, with the shares dropping over 40% in 2020 alone.
Fast forward to 2024, and the shares seem to be gaining momentum. In fact, they have risen over 10% this year alone. Broaden that horizon to three months, and the shares are up over 50%.
So, can this growth continue throughout the rest of this year? Let’s take a closer look.
Thoughts on value
easyJet shares currently trade on a price-to-earnings (P/E) ratio of 13. This is broadly in line with the FTSE 100 average, meaning the shares are roughly trading at market value.
Looking at competitors Deutsche Lufthansa and International Airlines Group, they trade on P/E ratios of 4.9 and 5.1, respectively. It does lead me to wonder whether easyJet valuation might be a bit rich compared to the rest of the sector.
However, considering the shares have jumped over 50% in the last three months, I would expect the valuation to look a little more steep than that. UK competitor Ryanair also trades at a higher P/E ratio of 14, which also makes easyJet look like less of an outlier.
Positive results
easyJet recently released strong Q1 2024 results. Group revenues increased by 22% year on year, with over 15,000 more flights completed in the quarter versus the year prior. Passenger numbers also increased from 17.5m in Q1 2023 to 19.8m.
One thing I also noted was the large reduction in net debt, which has fallen by 55%. Now sitting at just £500m, I like to see companies paying down debt in this way. The current historically high-interest rates (at 5.25% in the UK) make this an important move.
I expect it will be some time before these rates start to fall again, so reducing debt means that the firm will spare itself hefty interest payments in the meantime.
I’m not sold yet
The primary concern I have for easyJet is the close correlation between its performance and fuel prices. As we have seen with conflicts in the Middle East and Eastern Europe, fuel prices can be extremely volatile. Unfortunately, this is out of the airline’s control but drastically impacts its bottom line. In fact, fuel costs tend to account for around 25% of an airline’s total.
easyJet’s business is built around cheap flights. But when the cost of fuel rises, low prices become very tough to deliver. If such prices see another unexpected climb during 2024, the airline will be faced with a tough situation — absorb the additional expenses or increase ticket prices. Either this hurts the company’s bottom line or diminishes its primary competitive advantage.
I am comfortable with the current valuation, and the company has delivered some solid results. However, for me, the airline industry is too risky at the moment, given the potential volatility of fuel prices. For this reason, I am unsure whether the easyJet share price will continue to climb in 2024. Either way, I won’t be buying the shares today.
