Image source: Getty Images
I’ve been keeping a close eye on the easyJet (LSE: EZJ) share price for the last year, waiting for it to fly. Instead, it’s remained resolutely grounded.
The FTSE 100 budget carrier did benefit from the wider stock market recovery in April, after Donald Trump paused his tariff war, but has trailed back since. That’s surprised me, because I felt it had a massive potential, and I still do.
This morning (14 October), the easyJet share price jumped more than 11% at one point. That was after reports that the privately owned Mediterranean Shipping Company was exploring a potential bid. easyJet’s low market value of £3.6bn and its valuable landing slots at Gatwick, Milan, Paris and Lisbon make it a tempting target, analysts say.
The reports have since been denied, but the shares are still up over 4% today, so investors remain hopeful. The stock certainly looks good value, judging by its lowly price-to-earnings (P/E) ratio of just 7.57, roughly half the FTSE 100 average. But it’s performed poorly, down 6% over the last 12 months.
By contrast, the price of rival FTSE 100 airline International Consolidated Airlines Group, owner of British Airways, has doubled over the same period. Yet IAG also trades on a low P/E, in this case 8.45, suggesting low valuations may be a sector-wide issue. Airlines will always be risky: they’re vulnerable to recessions, wars, fuel prices, air traffic control strikes, and bad weather. Investors still bear the scars of the pandemic, when fleets were grounded but fixed costs plotted a steady course.
Rising profits and passengers
On 17 July, easyJet reported pre-tax profits of £286m for the three months to 30 June, up £50m year on year. Those are decent results, but the company warned of a £25m hit to full-year profits due to French industrial action. Higher fuel costs also took their toll. That’s the airline business for you, always one strike or storm away from turbulence.
Although today’s takeover speculation may fade, we can’t rule out further interest. Foreign buyers continue to pick off lowly valued UK firms, and easyJet certainly looks cheap now. Other shipping businesses have been buying stakes in European airlines, with Lufthansa and Air France both targets.
High risk, high reward
I’m worried about the wider state of the economy, because a further slowdown or recession could hit travel demand. Yet analyst forecasts look highly optimistic, with a consensus easyJet one-year price target of 643p. That would mark a bumper 33% gain from today’s 484p.
Of course that’s in no way guaranteed, but it does confirm my view that this is a high-risk, potentially-high-reward growth play. EasyJet shares could prove volatile if economic conditions worsen. Ditto if we get a wider market crash. But on the flip side, it’s also one of the more exciting recovery plays around.
Long-term investors who can handle the turbulence might consider buying today. But they shouldn’t do so based on takeover speculation, which so often ends in nothing. Instead they should look at long-term prospects for the underlying business. I think the skies are sunny, but prone to storms.
