Down 43% since 16 July! Is now a good time to buy the FTSE 250’s worst performer?

Our writer asks whether the significant drop — over the past three months — in the share price of the FTSE 250’s biggest loser is a buying opportunity.

| More on:

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 recent times, the share price performance of Wizz Air Holdings (LSE:WIZZ), the FTSE 250 budget airline, has been markedly inferior to that of its nearest rivals. Whereas easyJet and Jet2 have seen little change in their stock prices over the past three months, Wizz Air’s has fallen by 43%.

But this could be an opportunity. Its share price is now 50% below its 52-week high, achieved in June. And it’s 77% lower than its all-time peak of March 2021.

Challenges

To assess the investment case, I’m going to start with some of the risks that Wizz Air has to contend with.

Firstly, demand for air travel might be impacted by a global (or regional) economic slowdown. And intense price competition could affect the already tight profit margin of the low-cost carrier.

Then there are possible operational issues like air traffic control strikes, staff sickness, bad weather, lack of airport access, security incidents, the failure to obtain insurance cover, reduced availability of engines and the closure of airspace due to conflicts.

And financial risks — including the rising cost of fuel, fluctuations in exchange rates, increased borrowing costs, additional regulations, further carbon taxes, rising landing fees and delays in new aircraft deliveries — could all affect the airline’s bottom line.

If that’s not enough, there’s also the possibility of another pandemic.

But before I’m accused of being overly gloomy, I’d like to point out that these are the risks identified by Wizz Air’s own directors. Given their assessment, I’m surprised they want to run an airline, let alone get out of bed in the morning.

However, to be fair, all of these issues could affect any carrier. And yet investors appear to have more concerns about Wizz Air than they do about its peers.

Unable to fly

That could be because its operations have been badly impacted by problems with the supply of engines from Pratt & Whitney.

During the quarter ended 30 June 2024, an average of 46 aircraft were grounded, out of a total fleet of 218. Net profit fell to €1.2m, compared to €61.1m, for the same period in 2023.

Although it received some compensation from the engine manufacturer, it’s not enough to fully cover the lost revenue. And there’s the incalculable reputational damage caused by flight cancellations.

However, I’m sure these issues are going to be resolved soon. The airline should then resume its growth story. It carried 21.4% more passengers during the year ended 31 March 2024 (FY24), than in FY23.

It also increased its load factor by over two percentage points.

And encouragingly, the company’s directors remain committed, with two of them buying shares in August and September.

Final thoughts

However, there’s another problem that affects Wizz Air much more than its rivals. And that’s its level of indebtedness.

At 30 June 2024, its net debt was 3.9 times its EBITDA (earnings before interest, tax, depreciation and amortisation).

At 31 March 2024, the balance sheets of easyJet and Jet2 show a net cash position. Even International Consolidated Airlines Group, which was impacted by the pandemic more than most — and had to take on a lot of debt to survive — has a gearing ratio of one.

Therefore, until I see a sustained reduction in Wizz Air’s net debt position, I’m not prepared to invest.

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.

James Beard 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

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

A FTSE 250 share I’d buy and aim to hold for 20 years!

This FTSE 250 share has soared more than 2,000% during the past decade. Our writer Royston Wild thinks it has…

Read more »

Bournemouth at night with a fireworks display from the pier
Investing Articles

3 heavily discounted UK shares to consider buying in November

These three UK shares have been dragged down and our writer believes they're trading below their true value as we…

Read more »