At the time of writing, low-cost airline easyJet (LSE: EZJ) has seen a 7% tumble in its share price from yesterday’s close, evidently driven by its trading update released earlier today. The company itself says that it has “delivered a solid performance in the fourth quarter”, but investors appear to be unconvinced.
This led me to ask two obvious questions. First, what’s really going on here? And second, would I invest in the FTSE 250 company’s shares now?
Red flags in trading update
As it turns out, there are a few red flags in today’s report that explain the share price fall. The company expects revenue per seat to fall by 2.7% for the year. While EasyJet has seen an increase in capacity, resulting in an increase in the number of passengers carried, I imagine the demand has not been high enough to either increase per-seat revenue or keep it at par.
The airline does say that cost per seat will actually decline by 0.8%, but this number excludes fuel prices. It doesn’t give a per-seat cost number that includes fuel price, but it does say that total costs have increased by 12%. Among other reasons, high fuel costs are one. I think what can be read between the lines here is that cost per seat when fuel is included have increased.
It also expects headline profit to be in the “upper half of the previous guidance range” at £420 to £430m. But this too, is partly because of an unexpected demand surge as British Airways and Ryanair faced disruption. It’s not revealed, at least at this stage, the extent of the impact of these one-off events on the bottom line. However, what we do know is that it’s obviously not a sustainable increase in profits.
Forward bookings, are also uninspiring, being in line with last year.
Rough weather for the carrier
But an adverse reaction to the update is hardly the first blow to the budget carrier this year. A few months ago, it lost its place in the FTSE 100 as its market capitalisation no longer met the cut. Even though its full-year numbers have been relatively robust, its half-year losses clearly made investors panic. In the latest update, CEO Johan Lundgren also points to the “challenging market conditions” under which EasyJet has performed.
Steep price for an uncertain future
Despite all that the company has endured during the year, its share price is far from cheap. Its price-to-earnings ratio is at almost 22 times, which is far higher than that for comparable shares like Ryanair, at around 15 times, and Wizz Air, at 14 times. This doesn’t make a case for the competitors, who have their own set of challenges to contend with, but only serves to indicate that EasyJet isn’t cheap either.
I would like to keep the share on my radar, but as far as long-term investments go, there are shares with better performance records to be considered for now.
Manika Premsingh 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.