Wizz Air’s (LSE: WIZZ) share price hit extreme turbulence on 5 June, dropping 35% since then.
The very basic question I always ask as a long-term investor in such a situation is: will it recover in the next 30 years?
This is the period I regard as the standard investment cycle. It begins around the age of 20 with the first investments and potentially ends around 50 in a comfortable retirement.
If the answer to my question is yes, then I will look at how much value the stock has in it.
This is essentially the difference between its current price and the true worth of the underlying business. It is in the gap between the two that huge long-term profits can be made, in my experience.
This is because asset prices tend to converge to their ‘fair value’ over time.
Finding fair value
I have found the discounted cash flow (DCF) method to be the most useful way to establish fair value. This dates back to my early days as a senior investment bank trader and then 35 years as a private investor.
What it does is to clearly identify where any stock price should trade, based on cash flow forecasts for the underlying business.
This, in turn, factors in the key driver of any stock’s price, which is earnings growth.
A key long-term risk to Wizz Air’s earnings is failure to compete with the high degree of competition in its business space.
However, the consensus of analysts is that its earnings will grow by a very robust 18.7% a year to end-fiscal year 2027/28.
The DCF for the budget airline shows its shares are currently 75% undervalued at their £10.88 price.
Therefore, their fair value is £43.52.
So how does the business look?
The spark for the big drop on 5 June was the full-fiscal-year 2024/25 results. These showed a 61.7% year-on-year decline in operating profit to €167.5m (£141.1m).
The reason was that 42 of the 46 aircraft grounded a year before due to engine problems were still non-operational.
By the time of its Q1 fiscal year 2025/26 numbers, 41 were still grounded. At that point the firm said that they would not return to service until end-2027.
That said, the firm is still managing to generate strong earnings growth. Specifically, Q1 saw a 9.3% year-on-year increase in EBITDA to €300.2m. Revenue also rose significantly – by 13.4% year on year to €1.428bn.
Around the same time, Barclays highlighted a “far brighter future” for the airline. This is based on its strong position in the Central and Eastern European market.
As a result, the bank upgraded the stock to Overweight from Equal Weight. This reflects its expectations that Wizz Air will now outperform its sector.
My investment view
Aged over 50 now, I focus on shares that pay a high dividend yield so I can increasingly live off the income. Wizz Air pays no dividend, so it is not for me.
However, its projected strong earnings growth should push the stock much higher, given where its fair value is.
Consequently, I think the stock is well worth the consideration of other investors less focused on dividend income alone.
