How low can the easyJet share price go?

The Motley Fool
An airplane on a runway
An airplane on a runway

Budget airline easyJet(LSE: EZJ) has seen its share price steadily losing altitude over the last few months.

For those committed to adopting a patient buy-and-hold strategy, however, I think the company is rapidly approaching great value.

Upbeat on outlook

Today’s Q4 update was as good as could be expected. Registering a “strong performance” over the period, the business revealed that pre-tax profit for the full year would now be in the “upper half of previous guidance” at between £570m to £580m. That’s despite the £5.3bn-cap continuing to feel the effects of disruption across Europe due to strikes, air traffic restrictions and severe weather.

Passenger numbers for the last 12 months are expected to be 5.4% higher at almost 85m, with total revenue per seat up 6.5% at constant currency. Total reported revenue for the full year, including that from the company’s operations at Berlin Tegel airport, is forecast to be a little less than £5.9bn.

The firm was also optimistic on its outlook, predicting capacity to increase around 10% to roughly 105m seats over 2018/19. Revenue over the first half — October to the end of March — is likely to decrease by “low-to-mid single-digits“, however, following one-off benefits experienced this year (Monarch and Air Berlin going bankrupt, and Ryanair’s infamous period of flight cancellations). Foreign exchange headwinds are also expected to hit pre-tax profit by about £10m.

Perhaps most positively, an improved performance at Tegel over Q4 has led the company to predict that it will break even in Berlin next year.

Losing altitude… for now

Whether easyJet’s share price is likely to recover in the near term is difficult to say, especially given that today’s fairly bullish update looks to have been greeted with an apathetic shrug by the market.

Even news that Ryanair has been forced to cancel 250 flights across Europe, due to pilot and cabin crew strikes, hasn’t helped sentiment.

Findings reasons as to why this might be so isn’t particularly hard.

Clearly, the elephant in the room (Brexit) continues to weigh on investors’ minds. Hard, soft or whatever, the longer negotiations over our EU exit drag on, the more skittish the market is likely to become, particularly with regard to companies that are already operating in hyper-competitive, cyclical industries.

That said, it’s surely the case that at least some of this uncertainty is now firmly priced in.

At a little under 10 times forecast earnings for the next financial year, easyJet’s shares are looking better value by the day. And they’re certainly cheaper compared to rivals Ryanair and Wizz Air — both of whom have also seen their stocks slip over the summer months.

The former is also a great source of dividends. In 2018/19, analysts are forecasting a near-26% hike to the total dividend to 69.5p per share, equating to a bumper 5.25% yield at the current share price. Since neither Ryanair nor Wizz Air return cash to their shareholders, easyJet is a clear winner for income, as well as for value hunters.

Of course, a lot could happen over the next few months to impact on the share price and the security of these cash returns. Nevertheless, with its sound finances, strong brand, and quality management team, I think easyJet should emerge from any turbulence relatively unscathed.

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Paul Summers 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.