Budget airline easyJet‘s (LSE: EZJ) share price fell by 2% yesterday after the company released its first-half results. In contrast, the FTSE 100 index rose 1%. This suggests to me that investor sentiment is low for the stock after the company’s result announcement. Is the price drop a buying opportunity for me?
easyJet’s recent results
Revenue for the first half of 2021 fell by 90% year-on-year to £240m. This was primarily the result of lower passenger travel due to the lockdown. Passenger revenue fell by 91% to £170m and ancillary revenue fell by 87% to £70m. Ancillary revenue includes extra baggage, allocate seat, and seat changing charges, among others. So, this revenue segment also depends on more passengers. On the whole, I consider the revenue satisfactory considering the lockdowns and Covid-19 disruptions.
I also think the company’s liquidity position is good. It has cash and undrawn loans of about £2.9bn. The company successfully raised capital from various sources since the start of the pandemic. It was also able to reduce its cash burn for the second quarter to £38m per week on average, outperforming the company’s previous guidance of £40m per week.
Risks to consider
The company expects to fly 15% of 2019 capacity levels. This is lower than the expected passenger capacity for British Airways owner IAG, which is expected to be around 25% for the June quarter and the company’s own earlier estimate of 20%. Also, there is uncertainty on full re-opening due to new Covid-19 variants. The hope of resumption of summer travel was one of the reasons for the stock’s appreciation in the past few months. If the travel industry is slow to pick up steam, I think that easyJet’s share price might hit the floor.
The company’s operating costs will also rise when it starts its operations. So, the benefits will not be immediate for the company. Also, there is uncertainty on the number of countries where hotel quarantine is required. This will be an additional burden to flyers. So, holiday flyers might postpone their summer travel plans. This could further negatively impact the company’s revenues this year.
The company reported a pre-tax loss of £701m. This was within the management guidance range of £690m–£730m loss. I think various governments might keep some restrictions in place since international travel appears to promote the spread of variants. If this is the case, the company will need more time to return to profitability.
During the normal international travel period from the year 2015 to 2019, the company’s average price-to-earnings ratio was around 14. Using the 2019 diluted earnings per share (EPS) figure of 87.8p, the current share price is trading about 11 times. There is high uncertainty at the moment as to when the company will achieve this EPS. So, I believe that there is not much upside.
My final view for easyJet’s share price
The company’s share price rose about 75% in the past year. The successful vaccination drive and the expected start of international travel led to the strong upward movement. However, the increase new Covid-19 variants and also the uncertainty of travel regulations makes me feel that this is not the right time for me to buy easyJet. I would like to keep the stock on my watchlist.
