Why I think FTSE 100-member easyJet’s share price crash could be a buying opportunity

The Motley Fool
Businessman standing in front of screen
Businessman standing in front of screen

While the FTSE 100 has experienced a challenging 12-month period, the easyJet(LSE: EZJ) share price has endured an even more difficult year. It has fallen by more than twice the UK’s main index, with its shares being down by 24% in the last year.

Although there are continuing risks facing the budget airline, such as Brexit-related uncertainty and weak consumer confidence, it appears to offer recovery potential. As such, it could be worth buying alongside another possible turnaround stock which released an encouraging update on Thursday.

Improving prospects

The company in question is sports-betting and gaming specialist GVC(LSE: GVC). Its 2018 financial year was relatively positive, it said in a post-close update, with underlying EBITDA (earnings before interest, tax, depreciation and amortisation) ahead of expectations at between £750m and £755m. Its online growth remains impressive, with online net gaming revenue rising by 19%. The performance of the business in Europe was strong, with net gaming revenue growth of 16%. This helped to offset a weak UK performance, where revenue declined by 3%.

The company continues to outperform the wider gaming market. It is also gaining market share across all of its major territories. Recent acquisitions, as well as its US joint venture, are expected to catalyse its financial performance, with its bottom line forecast to rise by 10% in the current year. Following GVC’s share price fall of 26% in the last year, the stock now has a price-to-earnings growth (PEG) ratio of around 1.4. This suggests that it offers a wide margin of safety and could deliver a successful recovery over the long run.

Turnaround potential

easyJet also offers the potential for a successful turnaround. As mentioned, the company has experienced a challenging period which has caused it to underperform the FTSE 100 by around 12% in the last year. Although further risks may be ahead from the potential challenges posed by Brexit, as well as weak consumer confidence in the UK, the outlook for the company continues to be relatively positive from an investment perspective.

One reason for this is the margin of safety that the stock now offers. It trades on a PEG ratio of 0.6 as a result not only of its falling share price, but also because it is forecast to post a rise in net profit of 18% in the current year. The company looks set to benefit from resilient demand among consumers, many of whom may be trading down to budget airline options as a result of uncertainty surrounding the prospects for the UK economy.

Alongside this, easyJet also offers improving income prospects. Rising earnings are set to lead to an increase in dividend payments, with the stock now having a forward dividend yield of over 6%. Since dividend payments are covered twice by profit, they seem to be affordable and could help to catalyse investor sentiment over the medium term.

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Peter Stephens owns shares of easyJet. The Motley Fool UK has recommended GVC Holdings. 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.