Over the past six months, shares in low-cost airline easyJet(LSE: EZJ), have plunged 30%, underperforming the FTSE 100 by 20% excluding dividends. Following this decline, shares in the business are trading at a depressed forward P/E of 9.7 and support an above-market dividend yield of 5.2%.
These multiples might seem attractive for value-seeking investors, but before you buy easyJet today, there are several things I think you should be aware of.
One of the reasons why analysts have gone off it in recent months is because they are concerned about falling ticket prices across the airline industry. Competition is heating up, and easyJet is now losing its price advantage over peers.
Indeed, today Ryanair revealed just how aggressive competition has become across the European airline industry by warning that full-year 2018 profit could now be as low as €1bn down from previous guidance of €1.2bn — the group’s fourth profit warning in 12 months. Although passenger numbers are expected to increase 9% year-on-year, a 7% decline in ticket prices will offset most of this growth, the group informed shareholders.
To reduce its dependence on the volatile, and competitive airline market, easyJet is trying to diversify into the holidays sector. So far, this is a relatively small business and a tiny part of the overall group.
Commenting on its prospects last year, CEO Johan Lundgren told shareholders that just 500,000 people had used the company’s holiday service, but more than 20m passengers fly with the firm every year.
To try and get more passengers to book holiday packages, easyJet is planning to unveil a “radically changed” holidays arm towards the end of 2019. Management is optimistic these efforts will pay off over the long term. However, in the short term, increased investment in the holiday business is likely to weigh on group profitability. What’s more, there’s no guarantee that this business will be a success.
Selling holidays is notoriously tricky as Monarch and Thomas Cook both know.
Flight delays in Europe more than doubled last year as airlines and airport operators struggled to grapple with what analysts are calling “constrained airports“.
It doesn’t look as if this trend is going to come to an end any time soon. The number of passengers flying around Europe has exploded over the past decade, but the infrastructure supporting these flights has struggled to keep up. These delays are costing airlines big bucks.
EU law stipulates that if your flight has been cancelled or delayed you have the right to compensation of up to €600 or around £530. In easyJet’s 2018 financial year, the company had to cancel 6,814 flights due to disruption, up from 2,502 in 2017. The cost of disruption added an extra 4.4% to the cost per seat operated to £55.87, according to the report.
Flying above the rest
The three factors above could prove to be strong headwinds against easyJet’s growth in the years ahead. However, the firm is, in my opinion, a best-in-class operator and it has always managed to navigate successfully around airline industry turbulence — helping it get to where it is today.
I think this will continue as easyJet still has a tremendous competitive advantage over peers. Therefore, I reckon the stock could be an attractive investment today after recent declines.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Rupert Hargreaves owns no share 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.