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One bargain growth stock I’d buy ahead of easyJet plc

When tour operator Monarch collapsed into administration earlier this week, managers at budget airline easyJet (LSE: EZJ) immediately jumped into action.

Not only is the carrier set to benefit from the wave of tourists that now need to rebook their flights, but it is also reportedly bidding on Monarch’s coveted Gatwick landing slots. Winning these would enable the firm to increase its capacity from the UK’s second largest airport.  

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And it’s not just the collapse of Monarch that will help easyJet grow. Italy’s Alitalia SpA and Air Berlin Plc of Germany also filed for insolvency over the summer, taking a chunk of capacity out of the crowded European short-haul market. 

Making the most of a crowded market 

The demise of the company’s weak peers is excellent news for easyJet’s outlook. Indeed, in a trading statement published today, CEO Carolyn McCall said: “The current turmoil in the sector provides EasyJet with opportunities to capitalise on its strong customer proposition and grow and strengthen our positions in Europe’s leading airports still further.

For the full-year to the end of September, the company now expects to report a pre-tax profit for the year of between £405m and £410m. That’s at the high end of previous guidance but is a decline of at least 17% from fiscal 2016’s £495m. However, these figures include a £100m hit from the fall in the value of sterling, which is expected to ease to £20m for fiscal 2018. Advantageous fuel hedging should pare the kerosene bill by as much as £145m for the year ending 30 September 2018. 

As short-term headwinds abate, City analysts believe easyJet’s earnings per share will rebound by 18% next year to 99.4p as pre-tax profit recovers to £478m. Considering these figures, it looks as if at 1,250p, shares in the company are fully valued as they trade at a forward P/E of 12.3, in line with the five-year average. 

With this being the case, I believe that the company’s smaller, domestic peer Flybe (LSE: FLYB) might be a better buy for growth and value hunters. 

Making the most of a dangerous situation 

Since 2011, Flybe has struggled to take off. After an ill-advised expansion drive, the company had a near-death experience, and it has taken years for management to sort out the mess. Nonetheless, now capacity has been cut and the group has a strong balance sheet, the airline is well-positioned for growth. 

Passengers have responded well to the changes.  For the company’s first fiscal quarter, revenue was up 11.7% year-on-year as passenger numbers rose 7.1% and the yield per seat increased 7.9% to £51.73. 

One of the most attractive qualities about Flybe is that the company has no competition on more than two-thirds of its domestic routes. What’s more, the airline is a more attractive proposition than rail. For example, a flight from Cardiff to Aberdeen costs £110 and takes three hours. A similar train journey on the same day (22 November) costs over £200 and takes nine hours. 

As the turnaround starts to yield results, for the fiscal year ending 31 March 2019, analysts expect the company to earn 7.2p per share. Based on this estimate, the shares could be worth as much as 87.3p, 120% above today’s price if they command the same valuation (12.3 times forward earnings) as easyJet. 

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Rupert Hargreaves owns shares in Flybe. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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