The easyJet(LSE: EZJ) share price has been doing pretty well so far in 2019, starting to reverse its long slump of 2018.
First-quarter figures released Tuesday reinforced my colleague Paul Summers’ opinion that easyJet shares are still good value. And looking at the fundamentals, I find it hard to disagree on those grounds alone.
Earnings, and the resulting dividends, have been a bit erratic, and we’re looking at forecast EPS even as far as September 2020 that’s lower than the firm managed in 2015.
Now, that’s the nature of the airline business. And the trick is deciding whether the share price valuation allows for whatever dips might be around the corner, and whether there’s a sufficient margin for safety.
Looking at easyJet shares on a forward P/E rating of 10, dropping to nine on 2020 forecasts, I think there’s a strong argument that there is. Dividends help too, with forecast yields currently at more than 5%.
But the one thing that would stop me buying the shares is that it’s an airline, as airlines have almost no control of costs, service differentiation, or a host of other things that can go wrong.
That was brought home by the news that the drone chaos at Gatwick before Christmas cost easyJet £15m in passenger compensation and flight cancellations. That single event is not itself too damaging, but something more serious could hammer a company and cause a real share price slump.
There are other big costs that are totally outside an airline’s control too, with the main one being fuel. We’re still in a period of relatively low oil prices, but what if the price of a barrel should hit $75, $80, or even $100 again? When I consider all the possible risks, I’m still staying away.
Did I suggest airlines can’t offer much in service differentiation? Getting passengers and their bags safely and comfortably to their destinations on time is just about all I want from an airline. And it’s such an expensive business, I want it at the best possible price.
Well, Ryanair Holdings(LSE: RYA) seems to have some power over the quality of its service, having earlier this month been voted the 19th best short-haul airline flying from the UK, by a Which? survey of airline passengers. Oh, hang on, there were only 19 — and Ryanair has managed to come last for the sixth year in a row.
Last week’s profit warning showed another example of uncontrollable external factors, as the company lowered its full-year profit guidance from the €1.1bn-€1.2bn range, down to €1.0bn-€1.1bn.
That’s not a huge amount, but it’s been put down to lower winter fares resulting from excess capacity. Chief executive Michael O’Leary, citing Ryanair’s low-cost resilience, said the firm expects that “this lower fare environment will continue to shake out more loss-making competitors, with WOW, Flybe, and reportedly Germania for example, all currently for sale.”
That, for me, highlights the cut-throat nature of the low-cost airline business, and the lack of any real differentiation other than price.
Ryanair shares are valued on a forward P/E of 15, with only around 1% in dividends. I see no margin for safety there.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
Alan Oscroft 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.