Why I think the easyJet share price is a FTSE 100 bargain (and I’ve bought more)
Earlier this year I bought some shares in budget airline easyJet (LSE: EZJ). It’s turned out to be a poorly-timed purchase, as my original holding is now down by around 40%. As far as I can see, the main reason for this is uncertainty about Brexit.
I’m not disheartened. At least, not much. I may have paid slightly too much for my original holding, but I’m fairly confident the shares are worth more than their current price of about 1,175p.
To put my money where my mouth is, earlier this week I bought some more shares. Averaging down in this way can be a risky strategy — if I’m wrong, I’ll simply lose more money. So it’s something I only do when I’m strongly convinced that a stock is underpriced.
Why I’ve bought more
In my opinion, easyJet is probably the best-run and most attractive of the UK-listed airline stocks (with one possible exception).
Unlike Ryanair and British Airways-owner IAG, the orange-topped airline has largely avoided self-inflicted problems such as strikes, cancellations and IT meltdowns. Instead, management has focused on continued growth, taking advantage of the failure of former rivals such as Monarch.
This hard work seems to be paying off. easyJet recently confirmed that profits are expected to be in the upper half of the firm’s target range for this year. That means a headline pre-tax profit of between £570m and £580m, which is 40% higher than last year’s figure of £408m.
Analysts’ consensus estimates put the stock on a 2018 forecast P/E of 9.8, with a prospective yield of 4.6%. In 2019, the company is expected to jack up its dividend payments by 19%, giving the shares a forecast yield of 5.4%.
I see easyJet as a stock that could bounce back quickly if the government manages to agree some kind of Brexit deal. I’d rate the shares as a buy at current levels.
A low-risk alternative?
Even if airline travel is hit by Brexit, I don’t expect bus and coach services to be affected. Indeed, history suggests that demand for affordable public transport sometimes increases when fuel prices rise, as they have done recently.
All of this suggests to me that National Express (LSE: NEX) could be worth considering for a dividend-growth portfolio. Although it’s well known for its bus and coach services in the UK, this FTSE 250 firm actually makes the majority of its money overseas.
During the first half of this year, bus services in North America delivered £547.5m of revenue, 45% of the group’s £1,207m of total sales. Spain-based subsidiary ALSA — which operates in countries including Morocco — delivered a further £348m. Only £273m came from the UK. Profits were split in a similar way, with just 26% of adjusted operating profit coming from the UK.
Earlier this year, ALSA won a €1bn contract that will make it the largest bus operator in Morocco. Profits are expected to start arriving in 2020.
In my view, National Express stock offers investors exposure to an attractive, diversified and growing business. Analysts following the stock expect earnings to rise by 11% this year and 6% in 2019. Dividend growth is expected to be at a similar level.
These projections put the shares on a 2018 forecast P/E of 12 with a dividend yield of 3.7%. In my view this could be a profitable time to buy.
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Roland Head owns shares of easyJet. 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.
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