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4 reasons why easyJet’s share price is falling sharply

Budget airline easyJet (LSE: EZJ) has seen its share price crash spectacularly over the last three months. Back in late June, the shares were changing hands for just under £18. Today, the share price sits at £12.50, a decline of over 30%. What’s even more concerning is that the pace of the decline seems to be picking up, with the shares in freefall over the last month and falling 7% yesterday.

So, why is the share price crashing and do the shares offer value at the current price?

Uncertainty

There are a number of reasons and you don’t have to look too far to realise why investors are nervous right now. Take a look at this extract from the first paragraph of the group’s trading update last Friday: “Disruption across Europe continues to be an industry-wide issue and is having an impact on revenue, cost and operational performance, with the main causes being European industrial action and air traffic restrictions.”

Despite the fact that the airline told investors it is anticipating full-year 2018 headline profit before tax of between £570m and £580m, which is in the upper half of previous guidance, I think the market is probably quite concerned at that statement. It certainly adds uncertainty to the investment case, and if there’s one thing investors hate, it’s uncertainty.

Costs

Another issue is increased costs, as a result of the higher oil price. Here’s another concerning snippet from Friday’s trading update: “Headline cost per seat excluding fuel at constant currency excluding Tegel is expected to have increased by circa 3.8% for the full year, higher than previously expected, due to sustained high levels of disruption.”

So, not only did costs increase quite significantly, but this increase was also unexpected. The market does not like these kinds of surprises.

Ryanair

Then, compounding these issues, rival Ryanair came out yesterday and warned investors that its full-year profits will be 12% lower than previously forecast due to recent industrial action, higher oil prices and higher costs associated with EU compensation rules, and that it may even lower its forecasts again. Naturally, this news is not good for EZJ.

Brexit

Then, of course, we have ongoing Brexit uncertainty which is not going to help sentiment towards a stock like easyJet that has significant operations across Europe.

So, looking at these four issues, it’s not a surprise that easyJet is unpopular at present. Yet could the stock offer long-term potential at the current share price?

Falling knife

After the recent price fall, the shares are starting to looking quite tempting, in my view.

With analysts forecasting EPS of 118.6p and dividends per share of 55.3p for the year to 30 September, the estimated trailing P/E ratio is 10.4 and the potential yield is 4.4% (although be aware that the dividend policy is to pay out 50% of headline earnings per share so the dividend could be reduced if earnings are lower than expected). I see easyJet as a leader in its industry, and I think that at some stage it’s likely to emerge from the current difficulties as a stronger company.

Having said that, with the shares still falling, I’d be hesitant about buying easyJet just yet. Trying to catch a ‘falling knife’ is generally not a good strategy, so for now, EZJ is a stock to monitor closely.

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Edward Sheldon has no position in any shares mentioned. 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.