Is WizzAir 1 of the best value stocks out there?

Value stocks can be a tremendous way for investors to build long-term wealth. So is WizzAir currently in bargain territory? Gordon Best investigates.

| More on:
Hand of person putting wood cube block with word VALUE on wooden table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the ever-volatile world of airline stocks, Wizz Air (LSE: WIZZ) has recently caught the attention of many value-seeking investors, myself included. Despite facing industry-wide headwinds, this low-cost carrier might offer an intriguing opportunity for those willing to navigate through some turbulence. So is it really one to watch for long-term growth, or is it undervalued for a reason?

The company

Founded in 2003, the airline has grown to become a significant player in the European aviation market. Operating a fleet of 208 aircraft and connecting approximately 200 destinations across 50 countries, it has established a strong presence in Central and Eastern Europe. However, like many of its peers, the business has faced challenging times recently.

The shares declined by 27.8% over the past year, slightly underperforming the UK airlines industry, which saw a 27.2% drop.

To me, many investors still hold reservations about the sector, with many still remembering the sharp drops experienced during lockdowns.

Valuation

One of the most compelling aspects here is the valuation. The shares are trading at a staggering 74.7% below a discounted cash flow (DCF) estimate of fair value, suggesting lucrative returns if management can navigate the next few years successfully. This becomes even more interesting when considering that the company recently turned profitable, with earnings of £318.96m reported in the last year.

Looking ahead, analysts forecast earnings growth of 18.35% per year for Wizz Air. The company’s price-to-earnings ratio of 6.7 times also compares favourably to industry peers, further underlining its potential value proposition.

The future

The share price has been volatile over the past three months, reflecting the uncertainty surrounding the airline industry. The company also carries an extremely high debt-to-equity ratio of 696.2%. In an uncertain period, where interest rates are at recent highs and political stability is questionable, I’m nervous about what management would do if debt became a growing issue. The combination of volatility and uncertainty isn’t a great match historically, and it wouldn’t take much for investors to look elsewhere for returns.

Despite these risks, the business model as a low-cost carrier positions it well to capture market share as travel demand recovers. The company’s focus on Eastern European markets, which are generally less saturated than Western European routes, could provide avenues for growth that more established carriers might struggle to match.

Recent financial performance also offers some encouragement. With a net profit margin of 7.42% and revenues of £4.30bn in the trailing 12 months, the company has demonstrated its ability to generate profits in a challenging environment. I like what I see here, but for it to be meaningful, I want to see this trend continue for the next few years.

Better opportunities elsewhere

Wizz Air clearly faces significant challenges, but its current valuation and growth prospects make it one more risk-friendly investors may want to consider. The airline industry is notoriously cyclical, and the firm’s position as a low-cost carrier could allow it to benefit disproportionately from a recovery in travel demand.

However, I don’t like the look of the company’s high debt levels and the overall volatility of the airline sector. I feel there are probably safer investments out there, even if this one has a lot of potential.

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.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »