Are easyJet shares overvalued?

easyJet shares have surged 34.5% over the past six months. It’s one of the FTSE 100’s best-performing stocks. But maybe the bullishness has gone too far?

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Image source: easyJet plc

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easyJet (LSE:EZJ) shares recently rejoined the FTSE 100. This can be a real boost for stocks. It means they can benefit from increased attention as well as an influx of capital from funds that track the index.

This comes as shares in the low-cost airline surged from a nadir around October. In fact, the stock’s up more than a third over the past six months. But this rally does raise the question, are easyJet shares now overvalued?

What the City says

City and Wall Street forecasts can be a useful place to start when we’re looking to understand whether a stock is undervalued or overvalued. And despite the share price surging over the past six months, it’s clear that analysts think this airline stock still has further to go.

There are currently 11 ‘buy’ ratings, four ‘outperform’ ratings and three ‘hold’ ratings. Of course, these ratings can be outdated when a share price rises quickly — they’re not always updated frequently.

However, the average share price target provides some reassurance. The average easyJet share price target is £6.97, representing a 22.7% premium to the current price. That’s also a very good sign.

Backing this up

City analysts aren’t always right and sometimes, as noted, their forecasting can be a little outdated. Especially if the company in question isn’t particularly prominent. The best thing we can do therefore is to also conduct our own research.

Looking forward, analysts expect easyJet to earn 63.67p per share in 2024. That will rise, the forecasts suggest, to 70.29 in 2025, and 74.07 in 2026. In turn, this leads to a forward price-to-earnings ratio of 8.7 times. This ratio falls to 7.9 times in 2025 and 7.5 times in 2026.

With a growth rate of 5.2% during the period, the all-important price-to-earnings-to-growth (PEG) ratio would be around 1.67. As fair value is indicated by a ratio of one, these figures actually suggest that easyJet is a little overvalued.

However, it’s important to recognise that the PEG ratio isn’t perfect, and easyJet has several tailwinds, including robust demand and a best-in-class net cash position. The airline has a net cash position around £1bn.

The bottom line

easyJet’s an attractive investment opportunity, in my opinion, although the PEG ratio’s a little high and I still have a preference for IAG in the sector. Nonetheless, I’d still consider an investment in easyJet. The airline has strong cash position and modest valuation metrics — stronger than Ryanair but weaker than IAG.

It might sound trivial, and I’ve mentioned this before, but I like easyJet’s diverse fleet. Ryanair’s facing delivery delays due to production and safety issues with the Boeing 737 platform — the Irish flyer only operates this platform. Meanwhile, easyJet predominantly operates Airbus aircraft.

Also, I do wonder if some flyers might become more hesitant to travel on Boeing aircraft if safety issues persist. I recently elected not to fly Ryanair to Ireland to avoid the 737. It’s worth considering.

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.

James Fox has positions in International Consolidated Airlines Group. 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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