Why I think FTSE 100 stock easyJet still offers great value

Budget carrier easyJet plc (LON:EZJ) still looks a decent buy, according to this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Things haven’t been easy for airlines in recent times. Uncertainty arising from Brexit has impacted the share prices of pretty much every carrier over recent months.

But last week’s profit warning from Ryanair — its second in three months — neatly encapsulates other problems faced by the industry.

Despite carrying more passengers than originally forecast, the firm — recently named the ‘worst short-haul airline‘ – stated that necessary cuts to fares had hit earnings. As such, it’s now likely to generate profits in the range of €1bn-€1.1bn, rather than €1.1bn-€1.2bn in 2018/19.

While not immune from the low-fare environment, I still like the look of easyJet (LSE: EZJ) over the Michael O’Leary-led firm. Based on market’s reaction to today’s trading update, it seems I’m not alone.

Brexit-ready

Total revenue in the first quarter of its financial year rose by 13.7% to a little under £1.3bn. Passenger numbers in the three months to the end of December also increased — by 15.1% to 21.6m — although capacity growth was hit by late deliveries on new aircraft and the infamous drone ‘event’ at Gatwick in December. 

Ah yes, that incident. Despite keeping costs under control over the reporting period, the Luton-based business did suffer a £10m cost impact as a result of needing to support 82,000 stranded passengers and cancel 400 flights (although the number of cancellations in Q1 2019 was still lower than over the same period in the previous year).

In addition to the above, total revenue per seat also declined as a result of operations at Tegel still needing to be optimised, the move to new accounting standards, and one-off events not being repeated (e.g. the collapse of Monarch and Air Berlin, and Ryanair’s cancellation of flights). 

On a more positive note, easyJet reiterated that it was “well prepared” for Brexit, with 130 aircraft now registered in Austria as a precuationary measure, even though both the EU and the UK have given assurances that flights won’t be affected. Looking ahead, the company sought to reassure investors by stating that demand for flights “remains solid” and that forward bookings for after 29 March were “robust” and “ahead of last year,” despite no one still having any idea as to the exact form Brexit will take. 

While predicting a loss from its operation in Berlin, the company also said that expectations on pre-tax profits for the full year — ending in September 2019 — are “broadly in line” with what the market is anticipating. 

Still good value

I was positive on easyJet when I last covered the FTSE 100 constituent four months ago and there’s nothing in today’s figures to alter my view.

Lower air fares should lead to less competition as smaller rivals struggle to make ends meet. Although unpleasant for everyone involved, the drone fiasco last December should also ensure that security is increased at airports across the country, thus making this a mere blip for the £4.6bn-cap.

Moreover, the shares still look fairly cheap on a little over 10 times forecast earnings (Ryanair’s stock is still more expensive), and offering a 4.9% yield. A near-£400m net cash position is another positive that shouldn’t be overlooked.

So, although things are likely to remain turbulent for a while, I see any further falls in the price of easyJet’s stock as an opportunity to buy on temporary weakness rather than sell on fear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the 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.

More on Investing Articles

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »