The easyJet (LSE:EZJ) share price has run out of juice. After flying higher at the start of 2023, the FTSE 250 share traded within a tightish range before trending lower again from around mid-May. I’m giving it a close look today as I build a list of top stocks to buy.
Based on broker forecasts, the budget airline offers solid all-round value for money. At 437p per share, it trades on a price-to-earnings (P/E) ratio of 9.1 times for the upcoming year to September 2024. It also carries a market-beating 4.5% dividend yield.
Are easyJet shares too cheap to miss at current prices? Or is the company a classic value trap?
The scale of the airline industry’s turnaround has surprised almost everybody following the end of Covid-19 lockdowns. This is thanks to strong pent-up demand, along with the huge cash savings that some people built up during the depths of the pandemic.
The recovery over at easyJet has followed the wider trend. Revenues rose 34% in the three months to June to £2.36bn, latest financials showed, as passenger capacity returned to 90% of pre-coronavirus levels.
Critically its balance sheet has also kept improving. It swung to net cash of £300m in June from net debt of £200m a year earlier.
The trouble is that investors think that the airline industry could be running out of steam. It’s reflected in easyJet’s recent share price performance, along with those of industry rivals Ryanair and IAG.
Growing concerns over the European economy are a significant reason for this. During tough times consumers scale back on luxuries like holidays, and companies trim all non-essential spending.
On the plus side, budget operators like easyJet may fare better given their position at the cheaper end of the market. In fact they could benefit as people switch down from more expensive operators.
However, the scale of the downturn suggests that all airlines could be hit hard in the short term. Demand for extras like fast boarding and additional baggage allowances — a critical sales driver at easyJet — could also suffer as people scale back.
A steady rise in oil prices is also denting confidence in airline stocks. According to the Energy Information Administration (EIA), jet fuel prices averaged $3.07 per gallon at the end of August. That was up significantly from $2.05 at the beginning of May.
Rising fuel costs are a significant threat to airlines (they made up almost 30% of easyJet’s costs in the last quarter). And they are tipped by many to keep increasing due to constrained supply and strong demand from China. The key brent crude benchmark struck fresh 10-month highs on Monday near $95 per barrel.
Airlines’ profit margins are notoriously tight, and high levels of competition will keep them under pressure too. Meanwhile, renewed strike action by cabin crew and airport staff is another major threat to their recent recovery.
While easyJet shares look cheap on paper, I’d still rather buy other UK value stocks today.
Royston Wild 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.
Motley Fool UK 2023