Jet2 (LSE:JET2) is one of the standout value opportunities on the UK stock market — at least, that’s my take.
To be fair, my opinion’s based in data. So let’s allow the data to do the talking.
The valuation today
On the surface, Jet2 looks decent value. It trades at 6.5 times forward earnings and many data sites will report it having a massive £2bn net cash position — that would be a lot for a company worth £2.2bn.
Delve a little deeper, subtract the deferred revenue, and it’s clear that net cash is actually closer to £800m. But that’s still substantial.
What it means is we’re looking at a company trading at around 3.5 times net income. Even by airline standards, that’s super-cheap. In fact, my calculations suggest that the industry average is around double that.
The difference is even more stark compared to Ryanair — I’m sitting on one of its planes as I write. The Irish firm is almost three times more expensive.
Looking ahead
Of course, there’s a danger of looking at near-term valuations and thinking something is cheap. That’s how investors find value traps.
Instead, we need to consider where the company’s going and make assumptions or forecasts. In the near term, earnings are actually forecast to stand still as Jet2 invests in new facilities at Gatwick as well as a continuing fleet renewal.
So where will the business be in five years? Well, we can’t know where jet fuel prices are going to be — that’s up to 35% of operating costs — and we don’t know what’s going to happen to travel demand.
The first thing to consider is that the company should have many more seats on sale by FY30 — as much as 25% more with the fleet reaching 150 aircraft and the seat gauge increasing around 7%.
The business also expects the fleet overhaul to deliver a 20% fuel saving per seat — equal to £10 per seat. However, not all of those savings will be realised by the end of the decade.
One scenario
I put all the data I had into AI chatbot Claude and asked it to produce a forecast through to FY30. It took a mightily long time, and it became evident that it took it very seriously.
Now, this forecast turned out to be quite optimistic, mainly around costs. It has fuel, marketing, and landing costs remaining consistent across the period. It’s possible. Fuel could be materially lower if the Iran and Ukraine conflicts conclude for good. Marketing costs could fall with AI. But I wouldn’t bank on it.
So what did the headline numbers say? Well, it’s got revenue moving from £7.2bn last year to £10.5bn in FY30. And after two years of stagnation, it sees earnings per share move from around 206p to 355p as EBITDA almost doubles.
The bottom line
Of course, there are risks. If oil stays elevated, the thesis is blown apart. And that’s why it pays to stay diversified. However, it’s clear that there’s huge potential at Jet2. So much so, I believe it could be one of the biggest winners when UK investors regain their confidence.
Personally, I believe it’s well worth considering.
