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Why the easyJet share price could continue to soar higher than the FTSE 100

The easyJet (LSE: EZJ) share price opened 3.4% higher this morning after management upped its full-year profit guidance in a Q3 trading update. Following a “strong performance” in the quarter, the FTSE 100 firm said it now expects headline profit before tax for its financial year ending 30 September to be between £550m and £590m. This compares with previous guidance of £530m to £580m.

Over the past 12 months, easyJet has delivered an 18.4% total return for investors, soaring way above the 7.2% posted by the FTSE 100. Furthermore, its long-term performance has been just as impressive, averaging 19.6% annually over the last decade compared with the index’s 7.7%.

I believe easyJet and another outperforming firm in the travel sector offer good value at current levels. As such, I’d be happy to buy a stake in both businesses on the basis that I see them continuing to fly higher than the wider market.

From strength to strength

easyJet said its strong Q3 performance came on the back of “robust consumer demand” and “a benign competitor environment, with unfilled Monarch capacity and challenges for competitors in France.” This helped the company increase Q3 revenue by 14%, while the upgrade to full-year headline profit guidance came despite some industry-wide headwinds in costs, European industrial action and severe weather.

Such challenges tend to wax and wane, but the key thing is that easyJet goes from strength to strength. It continues to have plenty of scope for growth, as demonstrated by its move to introduce higher-capacity (lower-cost) planes on its most popular routes and its rapid expansion at Berlin Tegel airport, following the acquisition of parts of insolvent Air Berlin.

I see little risk from a new chief executive, following Carolyn McCall’s move to ITV after over eight year’s at easyJet. New boss Johan Lundgren is a travel sector veteran, latterly as group deputy chief executive at TUI. I reckon today’s profit upgrade at the midpoint will translate into earnings per share (EPS) of around 117p. At a share price of 1,700p, this gives a price-to-earnings (P/E) ratio of 14.5. Add in a prospective dividend yield of 3.3% and sector-leading balance sheet strength (£655m net cash at the last half-year end) and this is a stock I’d be happy to board.

Continuing positive performance

Meanwhile on terra firma, National Express (LSE: NEX) is another travel stock I’ve been keen on for a while and where I continue to see value. The road has been a profitable one for investors since Dean Finch took the driving seat in 2010. The annual total return over the last five years has averaged 13.7% compared with 7% from the FTSE 100. Over the past 12 months, the returns have been 14.9% versus 7.2%.

The provider of bus and coach services in the UK, North America, Spain and Morocco (and rail services in Germany) earned more than 80% of its operating profit from overseas in its last financial year. This helped it post an 11% increase in underlying EPS. It reported a “positive performance across all divisions” for the first four months of the current year at its AGM in May and analysts are forecasting another 11% rise in EPS (to 32.25p) for the full year. At a share price of 407p, I see great value here with a P/E of 12.6 and prospective dividend yield of 3.7%.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.