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He easyJet (LSE:EZJ) share price is currently trading more than 75% below its all-time high. Whether this is an opportunity for me depends on many factors, including how I compare this investment to other stocks.
I think the company deserves credit for being a very innovative and useful business. I have flown on this airline many times myself and I like that it offers cheap flights, unlike most other airlines.
However, in my opinion, the company's finances are not the best. There are strong reasons to believe that the low stock price could, in fact, be a “value trap.”
A value trap
A value trap occurs when a stock may appear undervalued at an attractively low price, but in reality the price deserves to be that way for valid reasons.
For example, in the case of easyJet shares, while the price-earnings ratio hovers around a healthy 9.5, there are deeper financial concerns. These include negative long-term earnings growth rates and a high level of debt at the moment.
One of the main reasons that could make easyJet look like a value trap is the effect of the pandemic on the business. If not for such a destructive turn of events, it is reasonable for me to think that the share price would have remained much higher than it is now.
What caused the pandemic
easyJet shares were trading at 1,260 pence before the pandemic. Now they are almost 500p.
Obviously, Covid-19 brought most air travel to a standstill for different periods, depending on location and jurisdiction. easyJet's revenue plummeted, falling from £6.4bn in September 2019 to just £1.5bn in 2021, a decline of 77%.
The company's total liabilities on the balance sheet also increased from 63% of assets in 2019 to 72% today.
However, surprisingly, the company has managed to maintain an equal amount of cash compared to debt today. This is important to consider when assessing easyJet's long-term prospects in relation to its ability to deal with its debt load.
The easyJet plan from here
Reading the annual reports and investor presentations, the organization clearly plans to stick to its low-cost business model.
This is the current strategy outlined by CEO Johan Lundgren:
The company also plans to pursue a “roadmap to net zero.” This is vital for an investor like me, who cares deeply about environmental, social and governance issues.
However, there is very little mention in recent reports and presentations about the company's recovery after the pandemic.
The good news is that easyJet's earnings per share have risen steadily from £2.70 in September 2021 (the nadir of the pandemic problems) to £10.90 today. That's an increase of more than 300%.
Watching carefully
While the company seems undervalued to me, the low price could be a trap if the organization does not increase its revenue growth rates to offset the significant drop from the pandemic.
I think there might be an opportunity here, but I also think it's too early to tell.
I don't want to risk getting stuck at a low price, so I'm just adding this one to my watch list to investigate further instead of buying the stock.
