The coronavirus has caused many industries to struggle for various reasons. The sectors that rely heavily on retail engagement have struggled due to calls for consumers to stay at home. Businesses with a large international presence are being hampered by supply chain disruption. But arguably, the industry hardest hit is travel.
Evidence from this can be seen by a 13% fall in the share price of easyJet (LSE: EZJ) in trading on Monday. This compounds an already dire 2020 performance, with the share price down 65%.
Why has easyJet slumped?
Let’s first rewind to six months ago. At the end of the fiscal year for easyJet, profit for the 2019 period was down 3.4%, but the overall report was fairly positive. Profit projections for the 2020 fiscal year were set slightly lower again (£420m vs £430m), but still with the business generating a healthy profit margin. At this point, there was no reason for investor concern.
If we fast forward to early February, the share price was climbing back above 1,500p, eyeing up its record highs of around 1,850p. Then came the coronavirus and the impact on travel. From the middle of February onward, it has seen a linear decline.
The main driver of this has been the lack of bookings or cancelled bookings from customers. For some this has been voluntary, with people not wanting to make a trip they had planned. But for others this has been forced by government travel bans, or lockdowns in destination cities.
Since easyJet only has an operating margin of 7.3%, it’s very sensitive to such a drop in bookings. And it can’t really discount prices in order to encourage bookings, as it’s already ‘budget’ in price.
What’s the outlook from here?
Last week, easyJet came out with measures similar to sector peers, announcing that it would be cutting routes. This can be seen as a logical cash saver in the short term. It has also requested help from the UK government in order to help provide the firm with liquidity.
And that liquidity may soon be needed, even though the balance sheet for the company looks robust on the surface. It currently has £1.6bn in cash and announced a further £427m worth of credit it has available to it. This sounds like a lot, but the firm is eating up cash every day.
So where does this leave the share price and anyone wondering whether to buy? For me, it’s a possible buy if certain things happen. The main spark that could trigger a halt to the sell-off would be an announcement from the government of some kind of rescue plan. While not being nationalised, having a guarantee of support could put a floor on the share price. This floor would limit the drop as it would be protected from going bust.
Given the company’s planes alone are valued at £4bn as assets, confirmation by the government would make me seriously consider buying at this cheap level. The assets alone provide the company with an intrinsic value. It would be a long-term buy and would need plenty of recovery time, but in my opinion the downside would be limited and it could be rewarding for patient buyers.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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Jonathan Smith and The Motley Fool UK have 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.