Why I think FTSE 100 stock easyJet still offers great value
Things haven’t been easy for airlines in recent times. Uncertainty arising from Brexit has impacted the share prices of pretty much every carrier over recent months.
But last week’s profit warning from Ryanair — its second in three months — neatly encapsulates other problems faced by the industry.
Despite carrying more passengers than originally forecast, the firm — recently named the ‘worst short-haul airline‘ – stated that necessary cuts to fares had hit earnings. As such, it’s now likely to generate profits in the range of €1bn-€1.1bn, rather than €1.1bn-€1.2bn in 2018/19.
While not immune from the low-fare environment, I still like the look of easyJet(LSE: EZJ) over the Michael O’Leary-led firm. Based on market’s reaction to today’s trading update, it seems I’m not alone.
Brexit-ready
Total revenue in the first quarter of its financial year rose by 13.7% to a little under £1.3bn. Passenger numbers in the three months to the end of December also increased — by 15.1% to 21.6m — although capacity growth was hit by late deliveries on new aircraft and the infamous drone ‘event’ at Gatwick in December.
Ah yes, that incident. Despite keeping costs under control over the reporting period, the Luton-based business did suffer a £10m cost impact as a result of needing to support 82,000 stranded passengers and cancel 400 flights (although the number of cancellations in Q1 2019 was still lower than over the same period in the previous year).
In addition to the above, total revenue per seat also declined as a result of operations at Tegel still needing to be optimised, the move to new accounting standards, and one-off events not being repeated (e.g. the collapse of Monarch and Air Berlin, and Ryanair’s cancellation of flights).
On a more positive note, easyJet reiterated that it was “well prepared” for Brexit, with 130 aircraft now registered in Austria as a precuationary measure, even though both the EU and the UK have given assurances that flights won’t be affected. Looking ahead, the company sought to reassure investors by stating that demand for flights “remains solid” and that forward bookings for after 29 March were “robust” and “ahead of last year,” despite no one still having any idea as to the exact form Brexit will take.
While predicting a loss from its operation in Berlin, the company also said that expectations on pre-tax profits for the full year — ending in September 2019 — are “broadly in line” with what the market is anticipating.
Still good value
I was positive on easyJet when I last covered the FTSE 100 constituent four months ago and there’s nothing in today’s figures to alter my view.
Lower air fares should lead to less competition as smaller rivals struggle to make ends meet. Although unpleasant for everyone involved, the drone fiasco last December should also ensure that security is increased at airports across the country, thus making this a mere blip for the £4.6bn-cap.
Moreover, the shares still look fairly cheap on a little over 10 times forecast earnings (Ryanair’s stock is still more expensive), and offering a 4.9% yield. A near-£400m net cash position is another positive that shouldn’t be overlooked.
So, although things are likely to remain turbulent for a while, I see any further falls in the price of easyJet’s stock as an opportunity to buy on temporary weakness rather than sell on fear.
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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.
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