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How low can the easyJet share price go?

Shares of FTSE 100 budget airline easyJet (LSE: EZJ) have now fallen by more than 20% from their 52-week high of 1,808p.

Despite this, the airline’s share price is still ahead of the FTSE 100 over the last year, during which it’s risen by 16%, compared to just 3% for the blue chip index.

Today, I want to explain why I’m comfortable with easyJet’s falling share price, even though it means my personal shareholding is currently underwater. I also want to consider a smaller aviation stock with ambitious growth plans and a big cash pile.

More people are going orange

easyJet’s strong growth has continued this year. Statistics for August show that passenger numbers have risen by 5.8% to 84.1m over the last 12 months. Adding new flights hasn’t left the airline with empty seats, either. Load factor — a measure of how full each plane is — has risen by 1.2% to 93.6% over the last year.

These numbers don’t include the airline’s loss-making Berlin Tegel operations, which it acquired following the collapse of budget flyer Air Berlin last year. Losses from Tegel for the year ending 30 September are now expected to be £125m, versus original guidance of £95m.

The airline has been restricted by an “inefficient inherited schedule” at Tegel this summer, and has focused on protecting its flight slots and building market share. Performance should improve in 2018/19, when the firm expects Tegel to break even.

Looks cheap to me

Despite short-term losses at Tegel, easyJet’s underlying financial performance has continued to improve. In July, management upgraded its guidance for full-year pre-tax profit to £550m-£590m, up from £530m-£580m in May.

Analysts’ forecasts put the stock on a forecast P/E of 11.7 with a prospective yield of 4.0% for 2017/18. Earnings are expected to rise by a further 17% in 2018/19, cutting the P/E to 10.

Although Brexit could disrupt airline operations next year, I suspect a solution will be found to prevent this. At current levels, I rate easyJet as a buy.

Poised for growth

If you’re looking for growth buys in the aviation sector, one company you might want to consider is small-cap Gama Aviation (LSE: GMAA).

This 35 year-old business provides a mix of charter, fleet management, and maintenance services for corporate and government customers. In February it raised £48m in a share placing. This money will be used to fund the acquisition of operations in Hong Kong and the development of new bases in the US and the Middle East.

The group wants to become the “leading global business aviation services group.” Half-year results published today suggests this could take a little time. Revenue rose by just 3% to $104.6m during the first half, while underlying pre-tax profit fell by 6% to $6.6m.

However, the company says full-year expectations are unchanged and that its move to a new European base at Bournemouth Airport is on schedule to complete this year, delivering “immediate efficiency savings.”

The placing has left the group debt free, except for lease liabilities, and with a net cash balance of $21m. Analysts’ consensus forecasts put the stock on a forecast P/E of 10 in 2018, falling to a P/E of 8 for 2019.

I’d want to do some more research before buying, but this looks like a potential growth opportunity to me.

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Roland Head owns shares of easyJet. 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.