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The demise of Flybe is sad, thought at least it is good news for their employees Ryanair Holdings and easyJet (LSE: EZJ) cries for staff. This got me thinking about investing in airlines. And if I had to choose one, I’d buy easyJet shares.
The stock price is up more than 50% year to date in 2023, so I will miss the 2022 low point if I buy now. But we’re still seeing a 70% decline in the last five years, and the airline business is just going backwards. So I see a lower recovery potential here.
Adjustable debt
What are three things I love about easyJet right now? First, easyJet is burdened with debt. The airline recorded net debt of £1.1 billion as of December 31, 2022. But the company has a market capitalization of £3.8 billion. And considering what we’ve done, I think it’s manageable.
International Consolidated Airlines, by contrast, had net debt at 30 September of £9.7bn. That’s more than the entire market cap of £8.4bn.
Ryanair has less debt than easyJet, so it will win only. But there is one thing that will stop me from buying it.
Our survey says…
Ryanair, probably easyJet’s closest competitor, consistently scores low in customer satisfaction. Maybe it doesn’t matter if it makes money. But there is little differentiation between airlines, and what difference there is can count in the long term.
There are often no alternatives for certain flights. But whenever I have a choice, I choose easyJet over Ryanair.
Also, when I buy shares in a company, I think about it as if I own the entire company. And I don’t want to have a company that customers consistently rate poorly. In contrast, easyJet usually scores better.
Evaluation
Forecasts suggest easyJet should return to profitability in 2023. That would put the stock at a price-to-earnings ratio (P/E) of 22. The company only said that “based on current high demand levels and strong bookings, easyJet expects to beat current market profit expectations for FY23“.
Analysts also have the P/E down in the next few years. For September 2025, it may be below 12. And we may see the dividend, currently at 4%.
I think this is a decent price for potential recovery at this stage, especially as the economic background may not turn out as painful as feared.
Airlines
So why am I avoiding easyJet shares? Although it may be the best buy right now, I see a big risk in the airline business.
This is reflected in the long-term stock price. Over the past 20 years, easyJet’s shares have soared. They have slightly underperformed the FTSE 100 overall. But investors unlucky enough to buy when they were soaring in 2015 will still be sitting on big losses.
For high-risk businesses, I want more potential upside than from the index as a whole. And I just don’t see it.
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