The easyJet (LSE: EZJ) share price has all the aeronautical abilities of a falling knife. It’s been one of the fastest falling stocks on the FTSE 100 for years, and most investors who chanced their arm in that time will have regretted it.
Over five years, easyJet shares are down 47%. They’re down just 3.09% over 12 months but are diving again, falling 7.46% in the last week alone.
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It’s not the only airline with sharp edges as British Airways owner International Consolidated Airlines Group and even sector supremo Ryanair have been falling in recent months.
Low-flying FTSE 100 stock
The airline sector is on the front line of every global crisis. Every economic slowdown hits business and leisure travel. As do inflation and interest rates.
Geopolitical tensions can close lucrative routes overnight. As can strikes, labour disputes and technical problems and pandemics.
Margins are tight due to intense competition and increasing environmental demands. Airlines also have high fixed costs and must reinvest constantly to keep their fleets fit to fly. I haven’t even mentioned fuel costs.
Many of these factors are cyclical, so if I had to buy an airline stock, I’d rather buy one when it’s flying low on investors’ radars than high. Hence my interest in easyJet today.
The budget carrier’s shares are in deep value territory trading at just 9.4 times trailings earnings. That’s comfortably below the FTSE 100 average of 12.7 times.
There’s another reason they’ve caught my attention. EasyJet’s profits climbed 16% to £236m in Q3. Passenger numbers rose 8%.
The group’s easyJet Holidays division is doing nicely, with profits up 49% to £73m. Q4 bookings look promising, too, while capacity is growing. CEO Johan Lundgren is looking forward “to deliver another record-breaking summer”.
This follows a promising 2023, when the group turned a £178m full-year loss in 2022 into £455m profit, as Covid receded.
Risky but with rewards
The balance sheet looks more robust. EasyJet ended 2023 with £41m of net cash. This climbed to £456m by 30 June.
Better still, it’s reinstating its dividend after three years and expects to pay 4.5p per share in early 2024. The forecast yield is now 2.9% but there’s room to grow, as dividends are handsomely covered 5.1 times by earnings. In 2020, directly before the pandemic, easyJet shares yielded 5.49%.
Given these positives, why is the share price down in the dumps? One worry is that total revenue per seat only rose 1% in Q3 as costs rose. As rival Ryanair warned on 22 July, summer fares are falling while increased air-traffic and handling fees push up costs. EasyJet will face the same pressures, with a weaker track record of flying through them.
The recent CrowdStrike outage also hammered airlines across the board, in yet another reminder of how vulnerable they are to external shocks.
I’m sorely tempted to buy easyJet at today’s low price, with a long-term view. It’s back on my watchlist. But given the risks, it’s not quite on my Buy list yet.
