In some ways, buying easyJet (LSE: EZJ) shares below 500p back in the spring of 2020 seemed like a bit of a no-brainer. The pandemic had just struck the markets and the company’s share price collapsed.
One argument for buying went something like this. The pandemic is a temporary setback and when it’s over, the business will likely recover rapidly.
Enormous financial pressure
However, one troubling fact emerged that made me pause with my finger hovering over the buy button. Legendary investor Warren Buffett sold his airline stocks instead of doing his usual trick of buying during a crisis. And he ditched his investments because he had no idea what the industry would look like in the future.
To me, the implication was that Buffett expected the worst. He probably saw trouble ahead and a long and tortuous path out of the pandemic. And if he did think that, he’s proving to be correct.
The virus is resilient and hard to suppress. It’s been on the rise again just as the UK faces the approach of the colder months of the year. It seems clear the fight against Covid-19 remains ongoing.
Meanwhile, the easyJet business has been under enormous financial pressure. In July’s third-quarter update, the company said: “Cash burn during the quarter reduced to £55 million.”
To put that figure in perspective, the entire operating cash inflow in 2019 before the pandemic was around £192m. Indeed, this reduced cash-burn rate is huge.
But the business can’t carry on like this forever. And the reality of the financial distress justifies the ongoing weakness in the share price. As I write, it’s below 600p again and the speculative rises we’ve seen have proved to be unsustainable. In May, for example, the share price was above 800p. But a year ago it was near 400p.
Another blow for the easyJet share price
But the latest blow for the easyJet share price was a good thing for the underlying business. It came in the form of the recent rights issue that raised a much-needed £1.2bn, or so. And on top of that, the company has agreed to terms for more debt with a new four-year senior secured revolving credit facility, worth $400m.
Whichever way I look at it, my conclusion is the business has a hunger for cash. And feeding it now may help it to thrive in the future. Meanwhile, it’s natural for the share price to fall to accommodate the dilutive effect of the Rights Issue.
However, with its balance sheet shored up by the new money, the company reckons the future for the business looks brighter. Chief executive Johan Lundgren said the new capital will help easyJet to “take advantage of the strategic investment opportunities expected to arise as the European aviation industry emerges from the pandemic.”
And I reckon the stock is more investable now than it was before the rights issue. But the pandemic is just the most recent of many challenges facing the airline industry. And easyjet’s stock chart tells the story of the firm’s vulnerability to cyclical influences, with its many ups, downs, and sudden reversals.
Rather than seeing easyJet as an unmissable bargain, I see the stock as a low-grade opportunity. I reckon it’s possible for me to invest better elsewhere.
Kevin Godbold 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.