The dramatic FTSE 100 plunge under 7,000 has suddenly brought the easyJet (LSE:EZJ) share price back into contention. The budget airline is now 26% cheaper than it was last week.
easyJet has also become one of the most traded shares on the FTSE 100 since concerns over the coronavirus outbreak hit markets hard. The shares now come with a price tag of 13 times the previous year’s earnings. This is well within the definition of cheap, especially if we believe in the future earnings power of the airline.
But I’ll tell you why in my opinion it’s definitely not time to jump on board.
Heathrow third runway illegal
easyJet has been saying since 2015 that, if the plans to expand Europe’s busiest airport went ahead, it would add dozens of planes out of Heathrow and passengers would see fares cut by 33% on some routes.
But UK climate change campaigners scored a major legislative win on Thursday. The Court of Appeal ruled that building a third runway at Heathrow would be illegal. That brings to an end a legal battle that has consumed the government since the £14bn project was first proposed in 2006. Most budget airlines do not currently fly out of Heathrow. That would all have changed if a third runway was approved.
That means a serious dent in these expansion plans. So the market has likely priced-in a lack of growth, a drop in future earnings and a lower easyJet share price valuation all round.
Coronavirus hits airlines hardest
Any other reasons? With fears over the long-term impact of coronavirus growing stronger, travel and tourism businesses have been hardest hit. Countries are locking down borders and holidaymakers are putting off travel plans indefinitely.
The International Air Transport Association wrote an initial impact assessment of the coronavirus spread. The 20 February briefing paper said airlines would lose $30bn in 2020 passenger revenue alone. Those carriers with greatest exposure to China, South Korea, Japan and south east Asia were expected to fall the most.
Not a problem for easyJet. But… with the outbreak near Milan in northern Italy and new cases confirmed in popular holiday destinations like Greece, France and Tenerife, some of easyJet’s most heavily-subscribed flights will see passenger numbers and revenues drop.
Similarly, despite reporting rising revenue in its last set of results, profits and passenger numbers, the stock of FTSE 250 budget airline Wizz Air has also been hammered in the past week. More than 20% has been sliced from its value. Its routes are also predominantly to Europe.
Hurts both ways
There are other reasons to be extra cautious around travel and tourism stocks like International Consolidated Airlines or TUI. Experts in influenza-type viruses suggest that when the current wave of new coronavirus cases comes to an end, the spread could be halted and go dormant before returning in even greater numbers in the winter. That would cause even more market panic.
The recent stock market sell-off is one of the harshest slides in a decade. A bear market could last a single week before rallying, or continue on for several months.
Money is the limiting factor for most private investors. Choice is not. There are other, better and even cheaper opportunities out there on the FTSE 100, FTSE 250 and AIM markets.
Tom Rodgers owns no share 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.