The smallest companies currently in the FTSE 100 typically have market values ranging £3.5bn-£4.2bn. This indicates the lowest valuation a company would need to progress to the blue-chip index.
Therefore, some of you may be surprised to hear me say that I think an AIM-listed airline with a market-cap of £2.4bn could reach the FTSE 100. The first issue however, isn’t the market-cap, it’s the listing.
AIM’s not part of the FTSE UK Index Series, meaning companies listed here aren’t eligible for inclusion in the FTSE 100, regardless of their size. To qualify, a business must have a premium listing on the London Stock Exchange’s Main Market and meet the index provider’s requirements around free float, liquidity, and nationality.
In other words, even if the airline’s valuation grows to FTSE 100 territory, it would first need to move from AIM to the Main Market before it could be considered for promotion. Only then would market capitalisation become the decisive factor.
For context, companies on the Main Market typically get more attention. They even get an uplift because of investments from index-tracking funds.
Vastly undervalued
So what is the company? Well, it’s Jet2 (LSE:JET2) and I think there’s a good argument that this is one of the most overlooked stocks in the UK. It combines both operational momentum with a rock-bottom valuation. It’s also the largest AIM-listed stock and is often considered a likely contender to move to the Main Market.
To start with, the company’s growing revenue at an impressive rate. Excluding the pandemic years, we can see sales moved from $5bn in 2023 to a forecasted £7.6bn in 2026. It’s expected to reach £8.3bn in 2027 as its new operating hub at Gatwick comes online.
Admittedly, earnings are expected to stand still this year and next, and that’s largely related to the costs of bringing the Gatwick hub online. When complete however, it expands its reach to one of the most prosperous parts of the UK.
But the valuation’s the most important factor. The stock’s now trading around 6.1 times forward earnings. That’s good, and cheaper than most of its peers. Remember, valuations should always be relative to peer groups as well as other factors such as growth.
Here, we also need to point out that Jet2’s sitting on a net cash position of £800m. So when we factor that in, it’s actually trading around 4.2 times forward earnings when adjusted for the balance sheet. The peer group average is closer to 9.5 times.
This doesn’t automatically mean that Jet2 should be trading 120% above where it is today. But it’s a huge indication that the stock’s being overlooked.
The bottom line
Jet2 isn’t immune to the usual concerns for airlines. This includes a spike in fuel prices, which can account for as much as 35% of operating costs.
Nonetheless, I’m still very bullish on the long-term outlook here and absolutely believe it’s worth considering. I do wonder however, if Jet2 really needs the Main Market just yet. With all that cash and continuing buybacks, management may be content with being overlooked… for now.
