A quick glance suggests the easyJet (LSE: EZJ) share price is cheap. The stock is changing hands around 700p today, that’s a little more than half of the level it was trading at 12 months ago.
As a value investor, this performance has attracted my attention. I’m always looking for cheap shares to add to my portfolio, and it seems as if easyJet might qualify.
However, this share price doesn’t tell us much about its underlying performance. Just because a stock price is lower today than 12 months ago, it doesn’t suggest the stock is cheap or worth buying. In fact, it tells us almost nothing.
A closer look at the easyJet share price
To understand if a business is really undervalued, I always start by reviewing its financials. And easyJet’s have deteriorated significantly over the past 12 months. The airline’s latest trading update reported a 88% slump in quarterly revenues as passenger numbers collapsed 87%.
To try and stem the bleeding, management has been aggressively cutting costs. Nevertheless, even after these actions, the company says it would burn through £40m a week if its fleet were fully grounded. With revenues down by nearly 90%, it looks to me as if it’s already close to this position.
Losing such a massive weekly amount clearly makes the business a risky proposition. These numbers also imply the easyJet share price is worth significantly less today than it was this time last year.
Indeed, 12 months ago, the airline had just reported £350m worth of net income for 2019. The group also chalked up net cash generation of £761m for its 2019 financial year, which works out at around £63m a week, according to my calculations.
These figures are only a rough estimate, but I think they illustrate just how much impact the pandemic has had on the low-cost airline. The business faces a tremendous challenge and uphill struggle to return to growth.
Still, despite the challenges the airline’s facing, it’s not a lost cause. The group has plenty of liquidity to weather the storm, at least for the next 12 months. As the vaccine rollout continues, consumer confidence to should start to improve and travel restrictions may be lifted. This could help the company return to growth.
And if the airline can return to 2019 levels of profitability, the easyJet share price looks cheap. The company reported earnings per share of 88p in 2019. A similar performance today would put the stock on a current forward price-to-earnings (P/E) ratio of 8. That’s compared to the stock’s long-term average, which sits in the mid-teens, far over the above estimate.
City analysts are forecasting the recovery to start in 2021 with further growth in 2022. Based on current analysts’ expectations, the stock is trading at a forward P/E of 13. That still looks cheap to me considering the price the market has historically been willing to pay for the stock.
While these projections don’t guarantee the company’s future performance, I think they show the potential for the easyJet share price. If the group can overcome the pandemic, the stock may be a good investment for me, but its recovery is still too far away for now.
Rupert Hargreaves has no position in any of the shares 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.