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Why I think this FTSE 100 stock could be high risk and high reward

The collapse of Thomas Cook in September meant the budget holiday package market was blown wide open. easyJet (LSE:EZJ) must have been licking its lips at the prospect of filling the void. 

The relaunch of its package holiday offering arrived in conjunction with full-year results in November 2019.

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Recent trading update

Last month, easyJet lifted its forecast for revenue growth after enjoying what it described as “strong” trading in the first quarter of its financial year.

The airline’s revenue rose by almost 10% to £1.425bn in the three months to 31 December 2019. The number of passengers carried climbed by 2.8% to 22.2m. This was a strong result in comparison to initial forecasts, which is always a favourable indicator.

Passenger numbers were up 2.8% to 22.2m as capacity rose 1% to 24.3m seats and aeroplanes were 91.3% full, up 1.6%. I believe this to be a direct result of the Thomas Cook debacle. 

This meant the airline’s revenue per seat increased 8.8% in the quarter ending 31 December, which was 4% ahead of consensus analyst estimates.

Full-year results and cost cutting

In November 2019, easyJet released full-year results that revealed that pre-tax profits have slumped 26% to £427m for the year ending 30 September 2019, compared with £578m for 2018. Revenues rose 8.3% to £6.4bn, but total revenue per seat fell 1.8% to £60.81 due to “some weakness in consumer confidence.”

It also announced intentions to make all flights net zero carbon and its goal to become the world’s first major airline to achieve this. This would come at a cost of £25m. To date, easyJet has maintained the £25m will not come from increasing ticket prices. 

Savings from a cost efficiency programme have totalled £139m, which is an impressive number. However, I am always skeptical about the long-term benefits when a company implements cost cutting measures. 

The verdict

On the surface of things, easyJet seems to be doing well with an increase in revenue and raised forecast. Much of the upturn, in my opinion, is a domino effect from the Thomas Cook scandal. 

Crunching the numbers in finer detail, this year’s dividend amounts are down 43.9p from last year’s 58.6p. That is, however, in line with expectations. The current price-to-earnings ratio is just short of 13, in comparison to just over 19 for the FTSE 100 index, in which it resides. 

Share prices in the last six months, since the first rumblings of the Thomas Cook affair, have seen an increase of almost 30% but reviewing performance on a day-to-day basis can sometimes seem like watching a yoyo. In comparison, the past five years have seen a drop in the share price of almost 30%. Make of that what you will. 

While there are positives to be taken from the recent results and updates, I feel there is always a high risk in investing in airlines. They are at the mercy of volatile fuel prices and competition is extremely fierce.

My verdict on easyJet would be to prepare for a potentially bumpy ride if you do invest. There is risk involved, but reward can come from risk.

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Jabran Khan 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.