Jet2 (LSE:JET2) shares are among the most undervalued in the UK, according to the 12 analysts covering the stock.
Now, institutional analysts — those from banks and brokerages — can always be wrong. However, when there are 12 of them saying the same thing, it’s typically a good sign.
So, I think it’s worth considering. After all, not many companies are going to be trading at such a huge discount.
Let’s take a look at why it may be so undervalued.
Why it’s cheap
Starting with the less great part… earnings growth. The business had been doing really well in recent years but there are new operational challenges.
Jet2 now faces rising costs that could limit earnings growth. Increases in the national minimum wage and employer insurance contributions have added to the wage bill, while higher airport charges further inflate operating expenses.
These pressures, combined with inflationary trends, are weighing on margins and may constrain short-term profitability. As it stands, we’re looking at 4% earnings growth annually across the medium term.
This could probably be why we’ve seen the stock pull back so much over the past four months or so.
However, I would suggest that the business is only going to get more efficient and productive over the long term. It’s investing — very sustainably — in new, more fuel-efficient aircraft, replacing its slightly older-than-average fleet.
What the metrics tell us
Jet2 shares certainly don’t look expensive at 6.5 times forward earnings. And as discussed before, earnings growth is modest, suggesting a price-to-earnings-to-growth (PEG) ratio over one.
However, the real strength is the company’s balance sheet. It has £2.1bn in net cash — including customer deposits. That’s only £500m less than the company’s current market cap.
In short, it’s trading at a fraction over one times net income when adjusted for net cash. That’s quite an incredible statistic that suggests the market is vastly overlooking Jet2.
So, why else might it be overlooked?
Well, it’s that efficiency aspect we spoke about before. It’s marginally less efficient at turning revenue into profit than easyJet, but a lot less than IAG.
As we can see, Jet2 lags IAG. And as investors often see profitability metrics as a sign of quality, it’s possible see why IAG shares are up 89% over one year but Jet2 shares are down 7%.
| Metric | Jet2 | easyJet | IAG |
|---|---|---|---|
| Return on capital employed (last year, %) | 15.8 | 8.97 | 17.3 |
| Return on equity (last year, %) | 29.6 | 15.7 | 57.9 |
| Operating margin (last year, %) | 6.2 | 6.3 | 13.2 |
However, I believe this margin story is overplayed in the context of the valuation metrics. Jet2 is simply too cheap to ignore even if its margins could be improved on — and they will be as it transitions to a more efficient fleet.
So, while there are some drawbacks and risks, it’s clear to see why analysts think this stock is 47% undervalued. It’s absolutely worth considering.
