FTSE 100 budget airline easyJet’s (LSE: EZT) share price is up 38% from its 5 August 12-month traded low of £4.09.
However, this still leaves it 63% down on where it was before the onset of Covid in early 2020.
This reduced global airline passenger numbers by around 90% that year and the following one. In 2022, it was hit by a surge in jet fuel prices after Russian energy supplies were sanctioned following the invasion of Ukraine.
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This in turn fuelled global inflation, pushing interest rates higher and catalysing a cost-of-living crisis that damaged the travel market.
That said, easyJet’s latest (full-year 2024) results show a continued improvement in its fortunes once again.
Continued cause for optimism?
2024 saw the UK’s biggest budget airline’s total revenue rise 14% year on year to £9.31bn from £8.17bn. Profit before tax soared 34% to £610m from £455m. And headline profit before tax per seat jumped 24% to £6.08 from £4.91.
As good as these numbers are, better is to come, according to the airline. The results include a forecast for around 3% capacity growth for full-year 2025.
It also projects about 25% growth in holiday customer numbers over the year, from a base of 2.5m. And as of the 30 September 2024 end date the results covered, 82% of H1 2025’s holidays had been sold.
There are many risks in the airline sector, and easyJet is not immune from any of them. One is the cut-throat competition in the business, which could squeeze its profit margins. Another is a sustained rise in the oil price, pushing jet fuel costs up again, so denting profits.
That said, consensus analysts’ forecasts are that easyJet’s earnings will grow by 10.4% a year to the end of 2027.
And it is growth in earnings that ultimately push a company’s share price (and dividend) higher over time.
Are the shares undervalued?
The results here are mixed in the three key stock valuation measures I have found most useful over the years.
On the price-to-book ratio, easyJet currently trades at 1.4. This is undervalued compared to the 2.7 average of its competitor group. This comprises Southwest Airlines and Jet2 both at 1.9, International Consolidated Airlines Group at 3.1, and Wizz Air at 3.8.
On the price-to-sales ratio, easyJet’s 0.5 valuation is the same as its peer group average.
And on the price-to-earnings ratio, it presently trades at 10.8 against a competitor average of 5.9. So it looks overvalued using this measure.
To cast some further light on the issue, I ran a discounted cash flow (DCF) analysis on the firm. Using other analysts’ figures and my own, this shows easyJet shares are 22% undervalued at their current £5.64 price. Therefore, a fair value for them would be £7.23 – not set to soar perhaps, but certainly to flutter higher.
Will I buy the stock?
I am at the later stage of the investment cycle, aged over 50 now. I focus on high-yield stocks that can generate strong, sustained passive income so I can continue reducing my working commitments.
EasyJet shares currently deliver an annual return of around 2.25%. My high-yield stocks average well over 8% a year, so this stock is not for me right now.
