Few companies on the London Stock Exchange have a price-to-earnings ratio as low as nine. When a firm trades at nine times earnings, it’s like investors are paying £9 for each £1 of yearly profit. This is the realm of cheap shares, basically.
Such lows are often found in ‘dying’ sectors. Oil and tobacco are industries where you might expect to find such cheap valuations these days. Even though profits might be good now, the long-term prospects of such companies are often bleak.
But sometimes a cheap P/E ratio can be a golden opportunity. Warren Buffett built an investing empire on the back of the ‘value investing’ approach – buying shares for cheaper than their worth. And there’s one cheap-looking stock on the FTSE 100 that I think the ‘Oracle of Omaha’ might be very interested in today.
Early signs
The stock I am talking about is airline easyJet (LSE: EZJ). As mentioned, the current P/E ratio is just nine. That looks cheap compared to the FTSE 100 average of 18. It looks like a steal compared to the American S&P 500 average of 30.
In easyJet’s case, this is more of a sector-wide issue. British Airways owner International Consolidated Airlines Group is valued similarly, with a P/E ratio of 7.9, the smallest on the Footsie at present!
What is causing the low valuations? Input costs are one issue. Airlines are paying a lot more for fuel since the Ukraine war began. Higher costs on staffing haven’t helped either, following the increase in minimum wage and National Insurance contributions.
The early signs of lowering demand is another factor. This was highlighted by Jet2 shares falling 14% in a day in September after warning of a “difficult market”. The same day, easyJet shares fell by 4%.
Buy the dip?
As a Foolish, long-term investor, I aim to focus less on short-term wobbles and more on good performance over the long run. A bit of turbulence can even be helpful to offer a cheaper share price.
Indeed, there are few things more profitable in investing than buying the dip. Conversely, there are few things harder in investing than identifying a dip with confidence.
easyJet’s success has been built on the rise of huge demand. Partly this is due the natural effect of globalisation. Folks are moving around countries more and thus making home visits more too. Partly this is due to people going on holiday more. Both factors I expect to continue.
It’s undeniable that airlines are facing serious challenges. But with investors spooked by the pandemic still in living memory and the valuation as cheap as it is, I’d not be surprised to see a turnaround in the coming years. I think easyJet is one to consider.
