Down 25%, is the easyJet share price a bargain?

The easyJet share price has tanked in recent months and the stock looks cheap. Is this a great buying opportunity or a value trap?

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The easyJet (LSE:EZJ) share price has nosedived recently. Back in April, it was hovering around the 575p mark. Today, it’s at 430p – about 25% lower.

Is the share price a bargain at current levels? Let’s discuss.

Created with Highcharts 11.4.3easyJet Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Low P/E ratio

At first glance, shares in the budget airline do appear to be in bargain territory.

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Currently, City analysts expect easyJet to generate earnings per share (EPS) of 65.8p this financial year (ending 30 September). So, at today’s share price, the forward-looking price-to-earnings (P/E) ratio is just seven.

That’s miles below the UK market average (about 14).

Forecasts could be too optimistic

The thing is though, that EPS forecast could turn out to be too high.

Right now, conditions in the European budget airline space appear to be deteriorating. This was illustrated yesterday (22 July) when rival Ryanair posted a 46% year-on-year drop in post-tax profit for the April to June quarter (its Q1) and missed analysts’ estimates.

Looking ahead, Ryanair warned that fares for the key summer months would be “materially lower” than last year due to the fact that customers are baulking at high ticket prices. So, I imagine easyJet will be looking at lower fares in the months ahead too (lower prices from Ryanair will put pressure on easyJet to reduce its prices).

Lower fares over the summer months are likely to lead to lower-than-expected earnings for this financial year. So, the shares may not be as cheap as they look at present.

We should get more clarity on the near-term outlook tomorrow (24 July), when easyJet posts its Q3 results.

Long-term outlook

What about in the longer term though? Could the shares turn out to be a bargain taking a five- or 10-year view?

Well, there’s a chance they could. After all, they’re well off their highs right now. But there’s also a chance that they could turn out to be a disappointing long-term investment.

While the long-term outlook for the travel industry as a whole looks attractive, there’s always some uncertainty when it comes to airlines. That’s because there are a lot of things that can go wrong for these companies (oil price spikes, staff strikes, geopolitical conflict and more).

Even when the travel industry is booming, there’s no guarantee that airline stocks will make investors money. Just look at share prices today – we’ve just come off an 18-month boom in travel where people were desperate to travel and easyJet’s share price hasn’t gone anywhere.

I’m not buying

Given the turbulent nature of airline stocks, I don’t plan to buy the shares myself any time soon. To me, they’re too much of a gamble.

I’m bullish on the broader travel industry though. I’m playing this through stocks such as hotel operator IHG, home rental business Airbnb, rideshare company Uber, and payments giants Mastercard and Visa – all of which have better long-term track records when it comes to generating long-term shareholder wealth than easyJet.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Kainos right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Kainos made the list?

See the 6 stocks

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.

Edward Sheldon has positions in Airbnb, InterContinental Hotels Group Plc, Mastercard, Uber Technologies, and Visa. The Motley Fool UK has recommended Airbnb, InterContinental Hotels Group Plc, Mastercard, Uber Technologies, and Visa. 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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