FTSE 100 stock easyJet (LSE:EZJ) has eased some investor concerns about the airline industry after Ryanair’s disappointing results earlier in the week. In fact, easyJet looks to be in a very strong position.
I’ve been optimistic — bullish — on easyJet for some time given its valuation metrics, but I’ve preferred its peer IAG — the British Airways owner. Both have very similar valuations, but I just see IAG as the more diversified option.
So do easyJet’s Q3 results change my opinion?
Strong data and stable bookings
The budget airline registered a 16% year-on-year increase in profit in Q3 with the firm highlighting positive movement towards its medium-term goals.
Headline profit before tax was £236m, up £33m from the previous year. Passenger numbers grew by 8%, while revenue per seat increased by 1%, meeting the company’s expectations.
easyJet holidays — the part of the business responsible for packages — contributed significantly with a 49% rise in profit to £73m.
The company’s net cash position has also strengthened further, reaching £456m by the end of June. That’s up from £146m at the end of the last quarter.
Moreover, the business’s notes on the current quarter were encouraging, with 69% of capacity for Q4 already booked. That’s up 1% versus last year but with an additional 7% of seating capacity on sale.
All in all, the results were very strong, with the stock surging in early morning trading.
“Our strong performance in the quarter has been driven by more customers choosing easyJet for our
unrivalled network of destinations and value for money,” CEO Johan Lundgren said in the Q3 report.
Should I buy easyJet shares?
easyJet certainly looks good value compared with Ryanair — the Nasdaq-listed peer’s vastly overvalued.
UK-listed easyJet is currently trading at 6.7 times forward earnings, 6.1 times projected earnings for 2025, and 5.7 times earnings for 2026.
These price-to-earnings ratios aren’t expensive compared to the index average, or even the global airline industry as a whole. Aviation stocks tend to trade at a discount as its something of a cyclical sector.
It’s also worth recognising that around 12% of the company’s market value is covered by the net cash position. This results in an EV-to-EBITDA ratio of just 2.1.
Overall, easyJet’s a really exciting investment proposition, and I see it pushing higher in the near term.
However, I still prefer IAG, and there are a couple of reasons for this.
easyJet is less diversified than IAG as the majority of its business is tourism and it’s entirely economy class. This leaves it vulnerable to a downturn in tourism, and notably ‘mass’ tourism.
And on that note, we’ve actually seen widespread anti-tourism protests in recent weeks. These protests are taking place in many of the destinations easyJet serves — Mallorca, Barcelona, Malaga etc.
The other reason’s personal. I already own IAG shares and US-facing SkyWest stock. Having three airlines in my portfolio would lead to concentration risk.
