Farewell FTSE 250! easyJet prepares for take off en route to the FTSE 100

Budget airline easyJet is poised to be upgraded from the FTSE 250 to a listing in the top 100. What does this mean for the share price?

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Key Points

  • Market cap has doubled in the past 16 months.
  • Share price could be significantly overvalued.
  • Strong balance sheet with good debt coverage.

The UK’s favourite low-cost airline looks set to leave the FTSE 250 and rejoin the Footsie. easyJet (LSE:EZJ) has enjoyed relatively decent growth lately, with latest revenue figures up 28.35% year on year since December 2022.

Over the past 16 months, easyJet’s market cap has doubled from £2.04bn to £4.16bn. It’s now larger than the seven lowest market caps in the FTSE 100, including St. James’s Place (£2.4bn), Fresnillo (£3.46bn) and Endeavour Mining (£3.64bn).

Rough landing

When Covid restrictions grounded all air travel in early 2020, easyJet’s market cap was battered — crashing from $8.6bn to $2.9bn in a matter of months. Since then, the airline has been relegated to the lower-ranking FTSE 250 index.

But provisional results from index compiler FTSE Russell indicate the airline may re-enter the FTSE 100 at the next reshuffle later this month. 

Susannah Streeter of Hargreaves Lansdown says consumers have begun to prioritise travel over other purchases. I imagine many do so to an even higher degree than before due to a perception of ‘lost’ travel time during Covid.

Brace! Brace!

While a return to the FTSE 100 reflects well on easyJet’s recent performance it doesn’t necessarily promise further growth. For that, I’m looking at the company’s financials and analyst forecasts.

After a great start to the year, easyJet shares fell 2% in the past month. However, this is not entirely unexpected after a period of significant growth.

Earnings are predicted to grow at 13% per year, faster than the industry average of 5.5%. So easyJet could still outshine its rivals in 2024. Fellow low-cost airline Ryanair‘s earnings are forecast to grow at only 12%, while Jet2 earnings are expected to decline at 1.4% per year.

Analysts on average predict easyJet’s earning-per-share (EPS) to grow at 13.2%. But despite a decent price-to-earnings (P/E) ratio of 12.69, most analysts still consider the shares to be significantly overvalued. This doesn’t necessarily mean easyJet is in a bad position or performing badly. Rather, investors have been overconfident about the price.

Subsequently, I expect to see a price correction in the coming months. But barring any further travel restrictions, I’ll hold on tomy easyJet shares in anticipation of a recovery later in the year.

The bottom line

Looking at easyJet’s balance sheet, I see relatively good debt coverage, with a debt-to-equity (D/E) ratio of 68%. Short-term assets and liabilities are equal at around £4.1bn, which is an improvement on recent figures. Its interest coverage ratio of 10 times is also more than sufficient. This is calculated by dividing operating income by interest expense, with any figure above two indicating lower potential for default.

So yes, the share price may be a little overvalued at the moment.

But decent financials and a solid balance sheet show promise. This, coupled with notable growth in the company’s new ‘holidays’ division, and I think easyJet deserves its upgrade to the FTSE 100.

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.

Mark Hartley has positions in easyJet Plc. The Motley Fool UK has recommended Fresnillo Plc and Hargreaves Lansdown Plc. 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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