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Is the easyJet share price a value trap that will lose you money?

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The easyJet (LSE: EZJ) share price has hit major turbulence during the Covid-19 pandemic. It’s plummeted by 60% this year so now many investors could be tempted into the shares, as they appear cheap on a P/E of seven. However, sometimes cheap shares can be a value trap and keep going down. So what could happen next to the shares?

Risks facing the easyJet share price

2020 has probably been the hardest year ever for airlines. Ongoing travel restrictions to many countries mean the effects of the pandemic aren’t going to go away for some time.

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Earlier this year, the group had ambitious plans to buy more aircraft, which were opposed by top shareholder and founder Sir Stelios Haji-Ioannou. But the plans indicated some confidence on the part of management in the future… at the time. 

Understandably, things are very different now. easyJet has cut its capacity for the fourth quarter to “slightly less” than the 40% previously planned. The group also reported on 14 August that it had received gross proceeds of £608m from the sale and leaseback of some aircraft.

Even so, after taking a number of cost saving actions, easyJet burnt through £774m in Q3. This is more than the whole profit for the previous tax year by some distance. Net debt has also risen as a consequence of the pandemic to £835m at the end of the last quarter. That’s an increase of 78.8% from March.

The damage caused will likely hurt shareholders for a while to come. It’s doubtful even if the pandemic ends more quickly than expected that easyJet will bounce back soon to operating as it did pre-Covid.

Any further fundraising from shareholders will also dilute investors’ holdings. I don’t think this can be ruled out if easyJet needs money to keep running. It’s another risk investors need to bear in mind.

Airlines rely on the summer to make most of their money – and typically lose money over winter. Apart from any development of a vaccine for Covid-19, I see no reason why the share will improve quickly.

The (small) reasons for hope

In my view, the shares are very risky. But a vaccine, or avoiding a second wave, may be saving graces for investors. This could see the share price bouncing back. 

The other positive is that easyJet has been able to raise money from investors. This has strengthened its balance sheet and gives it a better chance of survival. If rivals collapse, as is common in the industry, then easyJet may be able to capitalise post-crisis. Whenever that may be.

Let’s be honest. An investment in the easyJet share price now is just a gamble on what happens next with Covid-19. The price is just as likely to go down further as it is to bounce back up in my opinion. The winter months are usually tough for airlines even in a normal year. This year could really test even usually-strong operators like easyJet.

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Andy Ross 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.

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