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He EasyJet (LSE:EZJ) The share price has all the aeronautical abilities of a falling knife. It has been one of the fastest falling stocks on the market. FTSE 100 Index for years, and most investors who took the risk during that time will have regretted it.
EasyJet shares have fallen by 47% in five years. In 12 months, they have fallen by just 3.09%, but they are falling again, dropping by 7.46% in the last week alone.
It is not the only airline with sharp edges, as the owner of British Airways Group of consolidated international airlines and even the supreme sectoral Ryanair have been falling in recent months.
FTSE 100 shares in low trading
The airline industry is at the forefront of every global crisis. Every economic slowdown affects business and leisure travel, as do inflation and interest rates.
Geopolitical tensions can shut down lucrative routes overnight, as can strikes, labor disputes, technical problems and pandemics.
Margins are tight due to intense competition and increasing environmental demands. Airlines also have high fixed costs and must constantly reinvest to keep their fleets airworthy. And I haven't even mentioned fuel costs.
Many of these factors are cyclical, so if I were to buy an airline stock, I would prefer to buy one when it is low on investors' radar rather than high. Hence my current interest in EasyJet.
The budget airline's shares are in high-value territory, trading at just 9.4 times trailing earnings, comfortably below the FTSE 100 index average of 12.7 times.
There is another reason why they have caught my attention. EasyJet's profits rose 16% to £236m in the third quarter. Passenger numbers rose 8%.
The group's easyJet Holidays division is performing well, with profits up 49% to £73m. Fourth quarter bookings also look promising, while capacity is growing. Chief executive Johan Lundgren is looking forward to “to offer another record-breaking summer”.
This follows a promising 2023, when the group turned a £178m annual loss in 2022 into a £455m profit as Covid receded.
Risky but rewarding
The balance sheet looks more robust. EasyJet ended 2023 with £41m of net cash, up from £456m as of 30 June.
Better still, it is reinstating its dividend after three years and expects to pay out 4.5p per share in early 2024. The forecast yield is now 2.9%, but there is room to grow as dividends are generously covered 5.1 times by earnings. In 2020, just before the pandemic, easyJet shares yielded 5.49%.
Given these positives, why is the share price so low? One concern is that total revenue per seat rose only 1% in the third quarter, as costs rose. As rival Ryanair warned on 22 July, summer fares are falling, while rising air traffic and handling fees are pushing up costs. EasyJet will face the same pressures, as it has a weaker track record of flying via these airlines.
The recent Mass coup The service disruption also affected airlines in general, in another reminder of how vulnerable they are to external shocks.
I am very tempted to buy EasyJet at the current low price, with a long-term view. It is back on my list of stocks to watch, but given the risks, it is not yet on my list of stocks to buy.
