The Motley Fool

Why easyJet plc Could Double… But International Consolidated Airlines Grp Could Halve!

easyjetIt’s been a disappointing year for investors in easyJet (LSE: EZJ) and British Airways operator, IAG (LSE: IAG), with shares in the two companies falling by 4% and 7% respectively year-to-date.

However, the future could be much brighter; for easyJet in particular. Furthermore, shares in the budget airline could double over the medium to long term, while those of IAG could come unstuck. Here’s why.

Encouraging Updates

The last week has seen an update from easyJet, as well as positive comments made by IAG’s CEO, Willie Walsh, to a Spanish newspaper. Both show that the two companies are making encouraging progress and are set to deliver strong growth in profitability in the current year. Of particular note to IAG’s investors is the fact that a dividend could be payable as early as November, while easyJet’s sales numbers were boosted by an Air France strike.

Track Record

Indeed, strong and solid growth is something that easyJet has been able to deliver in recent years. That’s because its bottom line has grown in each of the last four years at an annualised rate of 56.5%. That’s an incredible growth rate and, over the period, the company’s earnings per share (EPS) have increased by six times.

This is in stark contract to IAG’s bottom line, which has been in the red for two of the five years and shown a considerable degree of inconsistency in between. Clearly, easyJet has been much better placed to take advantage of a more price-conscious consumer during the financial crisis.

Looking Ahead

In the current year and next year, easyJet is expected to increase EPS by 12% per annum. While below its average annual growth rate over the last few years, this is still around twice the growth rate of the wider market. Were easyJet to increase earnings by 12% per annum over the next six years, it would lead to a doubling of profit in that time. Assuming the company maintains its relatively attractive rating of 13, this could mean that its share price doubles over the period.

This may seem rather unlikely, but when you consider that shares in easyJet have risen by 266% in the last five years, it suddenly seems very achievable.

While IAG is making good progress after its merger, there is still a long way to go as a new entity. Indeed, as we have seen over the last five years, IAG’s bottom line can be hugely volatile and further challenges and disappointment cannot be ruled out in future.

As such, although it could go on to deliver strong share price growth, IAG remains a risky prospect that could see its share price come under pressure. As a result, easyJet appears to offer the better chance of a doubling share price and the lesser prospect of one that halves out of the two companies.

Of course, there is huge potential outside of the airline sector. That’s why we’ve put together a free and without obligation guide to Where We Think The Smart Money Is Headed.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.