Should I be watching the easyJet share price this summer?

With the summer holidays in full swing, many investors will be thinking about the easyJet share price, so is there an opportunity for further growth?

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As summer approaches, many investors are turning their attention to the travel sector, particularly airlines that stand to benefit from the surge in holiday bookings. One such company is easyJet (LSE: EZJ), the well-known, low-cost airline that operates extensively across Europe. But should investors be keeping a close eye on the easyJet share price this summer?

A strong comeback

The past few years have been turbulent for the aviation industry, since the Covid-19 pandemic grounded flights and decimated revenues. However, easyJet’s recent financial performance suggests it’s making a strong comeback. The company has again become profitable this year, a significant milestone in its recovery journey.

In its latest earnings report, easyJet posted a net profit of £374m over the last year. Moreover, with a gross margin of 32.91% and a net profit margin of 4.27%, it is demonstrating its ability to control costs effectively—a crucial factor for any budget carrier.

Valuation

Another reason to investigate the share price is its current valuation. A discounted cashflow calculation (DCF) suggests that the stock is trading at 6.6% below its estimated fair value. While this discount isn’t as steep as some other opportunities in the market, it still indicates that easyJet might be undervalued, offering potential upside for investors expecting some momentum in the sector.

For me, easyJet’s growth forecast is more compelling. Analysts predict that the company’s earnings will grow by an impressive 14.26% per year. As more people book summer holidays after years of restrictions, the airline is clearly well-positioned to benefit.

Furthermore, the consensus among analysts is overwhelmingly positive. They collectively forecast that easyJet’s stock price will rise by a substantial 45.5% from its current level. Such strong agreement among analysts is relatively rare and suggests a high level of confidence in the company’s prospects.

Risks

Investors often worry about the financial health of airlines, given their high fixed costs and vulnerability to external shocks. However, easyJet appears to be on solid footing.

That said, it’s worth noting that the company’s balance sheet does carry some debt. Its debt-to-equity ratio stands at 89.6%, which isn’t insignificant. However, this level of debt isn’t unusual in the capital-intensive airline industry, and easyJet’s profitability suggests it can handle its debt obligations comfortably.

The easyJet share price

When considering the share price, it’s crucial to look at its performance relative to the industry and broader market. Over the past year, the stock has been essentially flat, returning just 0.3%. While this might seem disappointing, it’s significantly better than the UK airlines industry, which saw an average decline of 18.2% over the same period.

However, easyJet did underperform the overall UK market, which returned 5.5%. This suggests that while it is outpacing industry peers, it hasn’t yet fully participated in the broader market’s gains. As travel continues to rebound, there’s potential to close this gap.

Overall

So, should investors be watching the share price this summer? To me, the answer leans towards yes. The company’s return to profitability and strong growth forecasts make it an intriguing prospect. Its potential undervaluation and excellent balance sheet add to the appeal.

For investors willing to accept the inherent volatility of airline stocks, easyJet’s share price is certainly one to watch this summer. I’ll be adding it to my watchlist.

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.

Gordon Best has no position in any of the shares mentioned. 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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