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Airline stocks have recovered remarkably since crashing during the pandemic. Some airlines have even seen their share prices double. But, easyJet (LSE:EZJ) stock has been an exception, as it is still below its 2020 value. So, here I would buy the stock.
The numbers are up
While easyJet continues to lag behind its peers, it is worth noting that the airline’s passenger numbers continue to recover rapidly. This has increased revenue, although the bottom line still lags by some margin.
| Metric | FY22 | FY21 | FY19 | Change vs FY19 |
|---|---|---|---|---|
| Passengers | 69.7 m | 20.4 m | 96.1 m | -27% |
| Load factor | 85.5% | 72.5% | 91.5% | -6% |
| Capacity | 81.5 m | 28.2 m | 105.0m | -22% |
| results | £5.77bn | £1.46bn | £6.39bn | -10% |
| Diluted earnings per share (EPS) | -22.4 p | -159.0 p | 87.8 p | -126% |
However, CEO Johan Lundgren is optimistic about it FTSE 250 company prospects. They expect revenue per seat (RPS) to rise 20%, and load factor to 87% this year. This should bring the company closer to pre-pandemic levels and profitability.
Concerns about an impending recession have led investors to fear that demand for air travel will decline. This has led to a lower number of domestic flights so far this year.
That being said, it’s important to note that most of the company’s revenue comes from international flights, even short-haul ones. Unlike domestic travel, international travel is forecast to continue to recover in 2023, which will benefit the stock. In fact, easyJet’s share price has risen by 20% this year.
As such Wizz Air and Ryanair reports there are no signs of slowing demand for short-haul International air travel either, I’m waiting for the orange airline to report a rosy set of figures in the Q1 update later this month.
Making easy money?
Before the pandemic, the group paid solid dividends every year. Unfortunately, shareholder returns have stagnated since then, as earnings have risen and debt levels have risen.
However, it should be noted that easyJet has one of the best balance sheets in the industry. If the conglomerate’s top and bottom lines continue to rise, analysts are predicting a dividend payout later this year. This will happen especially if budget airlines are profitable. So, I can imagine investors looking for passive income to start buying stocks, and sending the stock price higher.
The flying potential is higher
Apart from the dividend, the Luton-based airline also has excellent long-term growth prospects. From trying to develop a hydrogen-fuel engine with Rolls-Royceto the tailwinds of the industry which IATA estimates the number of passengers for air travel will grow to 8 billion passengers in 2040.
In addition, the likes of Bernstein and UBS rates the stock ‘buy,’ with an average price target of £6. This would give easyJet shares a 50% upside from current levels. Additionally, the price-to-sales (P/S) ratio is 0.5, and the price-to-book (P/B) ratio is 1.3, indicating the stock is trading at a reasonable value at that level.
easyJet is not known for its quality earnings as the average profit margin is less than 5%. However, the strong upward momentum of the recovery leads me to believe that growth stocks can achieve meaningful margin expansion if they are profitable. After all, with fuel prices falling, this is possible. Therefore, I will be interested in buying easyJet shares if my preferred broker launches UK shares on their platform.
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