With easyJet (LSE: EZJ) shares still languishing 72% below pre-pandemic highs, now might be a great time to buy in for the post-Covid recovery.
In fairness, easyJet isn’t the only struggling airline. While Covid is now an afterthought for many, airline stocks haven’t rallied after being shell-shocked by the impact of the virus. But that might be about to change.
Data from OAG Aviation shows global flights for the end of 2023 bumped above the same period in 2019. Passenger numbers for 2024 are predicted to rise to a new record as well.
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Revenues and profits
easyJet reported similar numbers in its latest update. In the three months to 30 September 2023, the airline flew 24.2m passengers – lagging only slightly behind the 28m in the corresponding period from 2019.
Over the same period, total revenue was up from £5bn to £5.2bn and pre-tax profit up from £528m to £660m.
Chief executive Johan Lundgren was optimistic, saying: “Our record summer performance demonstrates the success of our strategy and that demand for easyJet remains strong.”
This resumption in flying hours and passengers hasn’t overly impressed investors though. While the share price has been driven up in recent months, the current 508p share price trails its August 2020 figure after the shares crashed.
Analysts remain cautious too. JPMorgan, Deutsche Bank and Barclays all issued revised price targets after that update. None of the three expect any rise beyond 585p.
Competitor IAG is struggling as well, with a share price that won’t budge higher than post-Covid troughs.
Is it a buy?
From my perspective, I’m looking at a company reaching record sales and profits yet still presenting a heavily discounted share price. Looks like a good buy, doesn’t it? Well, two things are putting me off.
First, the firm diluted its shares during the pandemic. Many companies raised cash this way during Covid to keep the lights on, but it means easyJet has nearly double the number of shares in issue. Consequently, previous share prices aren’t a good comparison.
Further, the pandemic highlighted how vulnerable the airline industry is in general. Lundgren even spoke of the Middle-East conflict having “an impact” and it’s hard not to be wary of future events that could impact air travel.
easyJet trades at 12 times earnings as I write – lower than historical averages. Such a cheap valuation tells me other investors are also treading cautiously with this stock.
Downsides
If the shares are cheap, then I might be looking at an excellent contrarian play here. easyJet looks to be rallying now the worst of Covid is over, and I wouldn’t be surprised to see more share price gains in the next year or so.
However, the uncertainty here worries me. My investing philosophy is to find value while avoiding risks. I don’t think there’s enough clear value here at present, so this stock will stay on my watchlist for now.
