Can easyJet rocket like the IAG share price?

Harvey Jones has been astonished by the stellar performance of the IAG share price over the past year. Now he wonders whether rival easyJet can play catch up.

| 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.

The IAG (LSE: IAG) share price has soared over the last year, rocketing 110%. In contrast to this, easyJet (LSE: EZJ) shares have slumped 6%. The performance gap continues. Over the last month, IAG is up another 7%, while easyJet is down 12%.

This divergence raises an intriguing question. Can IAG maintain its momentum, or is easyJet now the better recovery play?

Both airlines are benefitting from a post-pandemic travel resurgence. However, IAG has raced ahead, which I put down to its premium offering, robust demand for long-haul flights and stronger transatlantic business. It also has greater pricing power due to its flagship brand, British Airways, and its ownership of Iberia and Aer Lingus.

One FTSE 100 airline is flying, the other is grounded

Meanwhile, easyJet has faced cost pressures, including fuel prices, wages and air traffic control issues. As a budget carrier, it struggles to pass higher costs to customers without denting demand.

Another key difference is financial resilience. IAG has higher operating margins of 13%, nearly double easyJet’s 7%, indicating superior efficiency. Yet despite their markedly different performance, both companies look relatively cheap.

IAG’s price-to-earnings (P/E) ratio is just 7.6, roughly half the FTSE average. EasyJet also looks cheap, trading on a multiple of eight times earnings. However, IAG’s stronger margins and momentum make its lower P/E look like more of an opportunity.

There’s one big issue though. IAG still has net debt of around €6bn. It’s steadily whittling that down but it remains a burden. By contrast, easyJet has a net cash position of £181m, giving it more of a safety net and greater flexibility to invest in its offering.

Neither stock is a strong income play. easyJet’s trailing dividend yield of 2.4% beats IAG’s 0.77%. However, IAG is restoring dividends rapidly, with a forecast yield of 2% this year, narrowing the gap with easyJet’s predicted 2.9%.

Both value stocks have their charms 

Despite recent underperformance, easyJet’s shares have plenty of scope to recover. The airline is expanding its holiday business, providing more stable revenue streams. It also has a strong brand and could benefit if European consumer confidence lifts.

If easyJet can improve its cost control and benefit from ongoing travel demand, its shares could take off. The budget airline sector remains highly competitive, but easyJet’s balance sheet strength gives it some breathing space.

Meanwhile, IAG continues to benefit from high-margin business travel and transatlantic demand, positioning it well for future growth. With the airline industry in recovery mode, both stocks could fly.

I’m a little nervous about buying easyJet. I almost took the plunge last summer but given subsequent share price volatility, I’m glad I resisted. Momentum is a powerful force, and right now, IAG has it. While I wouldn’t expect the shares to double in value this year too, there may be more to come. Of the two, I think IAG appears the stronger pick for investors to consider today.

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.

Harvey Jones 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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »

Investing Articles

Here’s why AstraZeneca stock jumped nearly 6% in the FTSE 100 today

FTSE 100 heavyweight AstraZeneca helped propel the blue-chip index to a record high today. Here's what investors were cheering.

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »