Prior to the coronavirus crisis, FTSE 250 Europe-focused airline Wizz Air (LSE: WIZZ) had been shaping up as a decent investment for many shareholders. And I think the stock is an interesting proposition right now.
However, since mid-February, the share price has plunged by more than 50%, which isn’t surprising given the grounding of around 85% of its air fleet. And the directors said on 23 March the entire fleet could end up being stationary. We’ve yet to hear about the halting of operations in Romania, Hungary and Bulgaria. Planes were still in the air a week ago when we last heard from Wizz.
Strong balance sheet
But any future good news – such as the lifting of airline travel restrictions – will surely see the immediate re-start of operating activities and an upward surge in share prices for airline firms such as Wizz.
However, the unknown factor is whether such companies can remain solvent for the duration of the crisis with near-zero revenues. Of course, the UK government’s promise to take care of 80% of the payroll for companies, and other measures, will likely help with costs. And Wizz flew into the crisis with a decent-looking balance sheet. Last November’s half-year report revealed cash and equivalents of around £1.6bn, offset by borrowings close to £2bn.
Investment banker Berenberg thinks Wizz will be a survivor in the industry. The firm recently put out a brokers’ note elevating its recommendation on Wizz from ‘hold’ to ‘buy’, saying the near-term survival of the business will benefit from “high starting liquidity, a larger proportion of variable costs (than some of its competitors) and an ability to win supplier concessions.”
I wouldn’t pin all my hopes on the opinion of just one broker. Instead, I’d do my own research. But Berenberg makes an interesting point about the difference between fixed and variable costs. As implied, fixed costs usually remain ongoing whether a company is turning over business or not. Whereas variable costs rise and fall along with the levels of business a firm is undertaking.
Looking ahead, the Wizz directors reckon the “ultra-low-cost business model” will help the firm survive even a prolonged grounding “substantially beyond” the current estimates for the duration of the coronavirus pandemic in Europe.
I’m keen on this share and see it as having huge potential to rise as soon as the crisis starts to improve. But it’s also a risky stock right now. Conditions could deteriorate further, and the crisis may extend for longer than we can currently imagine. Therefore, the Wizz share price could move lower than today’s 2,130p.
So, I’ve got this one on my watch list for the time being and will be looking out for improving general economic news flow. Of course, I’d be unlikely to catch the bottom of the share price move with such a strategy. But the insurance of a little more clarity about future operations would be worth the ‘cost’ to me.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Wizz Air Holdings. 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.