The easyJet (LSE: EZJ) share price fell by 6% on Tuesday morning, after the airline said it would cancel some planned flights in response to the latest UK quarantine rules. These affect travellers returning from some popular Greek islands.
The stock surged to nearly 900p in June, when investors expected a return to regular flying with the help of safe travel corridors. Things haven’t turned out that way and the outlook remains uncertain. easyJet’s share price is now down below 600p again.
In this piece I’ll explain why I remain positive on this budget operator. I’ll also look at an aviation stock I’d buy today.
The easyJet share price should rise, but I’m not buying
easyJet boss Johan Lundgren says that the airline now plans to fly “slightly less” than 40% of its planned schedule for this quarter. This may put extra pressure on the group’s finances, but I don’t think investors need to be too concerned.
easyJet has raised more than £2.4bn since the pandemic started, through a mix of debt, aircraft sales, and new equity. I think this will probably be enough to allow the airline to get through this difficult period.
Indeed, on a medium-term view I’m confident easyJet will remain successful. I think there’s a good chance easyJet’s share price will be back at 1,000p within five years. However, despite this tempting gain, I’m still not buying.
The reason for this is that I just don’t invest in airlines. As my colleague Alan recently explained, easyJet may be a good business, but it’s in a bad sector. There are simply too many things that can go wrong.
If you want exposure to the aviation market, I think there are better choices.
I’d fly with this stock
Despite my decision to avoid airline stocks, I think that the aviation sector will make a steady recovery. Given this, one stock I would consider buying right now is FTSE 250 engineering group Meggitt (LSE: MGGT).
Meggitt operates in three sectors – civil aerospace, defence, and energy. Civil aerospace and defence are the most important and generate about 90% of sales.
Given the uncertain outlook for the economy, I think the defence business is a key attraction at the moment. Trading in defence has been stable this year, and I don’t see any reason why this should change.
On the other hand, sales in Meggitt’s civil aerospace division fell by 27% during the first half of this year. New orders dried up and demand for maintenance parts slowed, as aircraft were grounded all over the world.
However, the company says that its parts are said to be fitted to “almost every jet airliner, regional aircraft and business jet in service”. Demand may be low right now, but I’m confident it will recover as flying levels start to rise.
Meggitt’s share price has followed the easyJet share price downwards this year. Both stocks have fallen by around 57%. However, I think Meggitt’s history of strong profitability and the stability of its defence business make the shares a more appealing buy than easyJet.
Broker forecasts suggest that Meggitt shares are currently trading on 15 times 2020 forecast earnings. That multiple falls to 12 times earnings for 2021. With the share price at a 10-year low, I reckon now could be a great time to buy.
