Easyjet shares fell 20% after a profits warning in mid-January. They were torpedoed by soaring oil prices and the disruption from December’s ‘mini Ice Age’. So why do I still think Europe’s second-largest budget carrier is a recovery play?
Well, given the strength of its brand, the firm should continue to win market share as its low-cost fares attract cash-strapped consumers. Picky travellers are also migrating to airlines such as Easyjet, which are least in danger of going bust. Why run the risk of turning up at the airport, only to discover at the check-in that your tin-pot operator has collapsed?
Many competitors, especially the national flag carriers, are in total disarray. Some are even being forced to withdraw services as jet fuel costs rocket. Not so Easyjet. It has just ordered 15 new Airbus A320s, which should drive strong organic growth while also improving efficiency. By aggressively cutting overheads and beefing-up ancillary services, such as baggage handling, the board is aiming to lift profit per seat from £3.36 today to £5.00 per person over the next few years.
That’s not all. Corporations are increasingly choosing its services. Many are attracted by Easyjet’s recently launched package, which gives business travellers unlimited flexibility to change flights up to two hours before scheduled departure. It also offers speedy boarding, no booking fees and a checked-in bag at no extra cost. The strategy appears to be working, with traffic numbers up 19% in January and another 13% in February.
Sure, the Middle East crisis is unnerving investors. Yet the good news is that Easyjet has hedged 70% of its oil requirements until September 2011. Besides, at some point – probably at around the $120/barrel mark – we should see some softening in the crude price.
Easyjet (LSE: EZJ), rated a BUY by Société Générale
The City is forecasting revenues and underlying earnings per share (EPS) of £3.3bn and 37.2p respectively for the year to September 2011 and £3.6bn and 44.3p 12 months later. As such, the stock trades on mean price/earnings (p/e) ratios of 9.7 and 8.1 and is set to pay a maiden dividend in 2012. On this basis, I would rate the group on a 12.5 times p/e ratio, equivalent to an intrinsic worth of 465p per share.
So what headwinds could blow the business off course? The biggest risk is another oil spike. If this occurs, fares across the industry should rise to offset the hit. Another concern is a prolonged double dip – some people may decide not to travel, which would affect Easyjet’s 87% load target. Finally, there are the usual worries of foreign-exchange fluctuations, departure taxes, air-traffic-controller strikes, terrorism and accidents.Nevertheless, with such a compelling low-cost service and a whole host of valuable landing slots in places such as Gatwick, Paris and Geneva, Easyjet is in an excellent position to weather any slump. Société Générale has a price target of 490p per share.
Recommendation: BUY at 362p