Shares in easyJet (LSE: EZJ) have fallen by over 7% today after its update highlighted the difficulties the business is facing. Despite those challenges, its revenue rose by over 7% in the quarter, which shows it has a strategy that’s able to overcome the issues it faces. Given its lower valuation, sound strategy and bright long-term future, now could be a perfect time to buy a slice of the business.
Difficult trading conditions
Operating conditions for airline companies such as easyJet and IAG (LSE: IAG) have been tough in recent months. Inflationary pressures have increased and capacity on European short haul flights has been growing, partly spurred on by lower fuel costs. In addition, demand for flights has come under a degree of pressure following the Berlin Christmas market attack. This has contributed to a decline in easyJet’s revenue per seat of over 8% at constant currency, with the company’s load factor decreasing by 0.3 percentage points to 90%.
Despite this, the total number of passengers carried increased by over 8% and this pushed revenue higher by over 7%. This was driven by growth in capacity of 8.6% and alongside this, easyJet has been able to improve its business to a significant extent. For example, it has reduced costs and generated higher revenue from channels other than seats. Furthermore, it has strengthened its financial position through a $500m new bond issue and an extension of its $500m revolving credit facility.
Sterling’s weakness is expected to negatively impact easyJet’s pre-tax profit for the full year by around £105m. While disappointing, this trend could continue since the pound may weaken further as Brexit negotiations begin. As a result, the company’s guidance for the full year may come under further pressure.
However, with easyJet trading on a price-to-earnings (P/E) ratio of 11.7 and forecast to grow its bottom line by 12% next year, it appears to offer a sufficiently wide margin of safety to merit investment. In fact, it has a price-to-earnings growth (PEG) ratio of less than 1, which indicates that it offers growth at a reasonable price.
Certainly, easyJet’s outlook is brighter than that of British Airways owner and sector peer, IAG. The latter is expected to record a fall in its bottom line of 2% this year, followed by growth of 4% next year. This puts it on a PEG ratio of 1.7 which, while still appealing is less so than for easyJet.
Furthermore, easyJet may be better able to cope with the higher supply and potentially lower demand outlook in the short term for European short-haul flights. Its focus on cost management and a budget offering could differentiate it yet further from IAG and lead to superior share price performance.
Clearly, the outlook for easyJet and IAG is difficult and the challenges they’re currently facing look set to continue over the medium term. However, given the former’s low valuation and sound strategy, now could be the right time to buy it for the long term.
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Peter Stephens owns shares of easyJet. 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.