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In the ever-volatile world of airline stocks, fresh air (LSE:WIZZ) has recently caught the attention of many value-seeking investors, myself included. Despite facing industry-wide headwinds, this budget carrier could offer an interesting opportunity for those willing to weather some turbulence. Is it really an airline to watch for long-term growth or is it undervalued for some reason?
The company
Founded in 2003, the airline has grown to become a major player in the European aviation market. With a fleet of 208 aircraft and connecting approximately 200 destinations in 50 countries, it has established a strong presence in Central and Eastern Europe. However, like many of its peers, the company has faced difficult times recently.
The stock has fallen 27.8% over the past year, slightly underperforming the UK airline industry, which has seen a 27.2% drop.
In my opinion, many investors still have reservations about the sector and many still remember the sharp falls suffered during the lockdowns.
Valuation
One of the most attractive aspects is the valuation. The stock is trading at a staggering 74.7% below the fair value discounted cash flow (DCF) estimate, suggesting lucrative returns if management can successfully navigate the coming years. This is made even more interesting when you consider that the company has only recently started to turn profitable, with profits of £318.96m over the past year.
Looking ahead, analysts forecast earnings growth of 18.35% annually for Wizz Air. The company’s price-to-earnings ratio of 6.7 times also compares favorably with its sector peers, further underlining its potential value proposition.
The future
The stock price has been volatile over the past three months, reflecting the uncertainty surrounding the airline industry. The company also has an extremely high debt-to-equity ratio of 696.2%. In an uncertain period, when interest rates are at recent highs and political stability is questionable, I am concerned about what management would do if debt became an increasing problem. The combination of volatility and uncertainty is not a good combination historically, and it would not take much to send investors looking elsewhere for profitability.
Despite these risks, the company’s low-cost business model positions it well to capture market share as travel demand recovers. The company’s focus on Eastern European markets, which are typically less saturated than Western European routes, could offer avenues for growth that more established airlines may struggle to match.
Recent financial results are also encouraging. With a net profit margin of 7.42% and revenues of £4.3bn over the last 12 months, the company has demonstrated its ability to generate profits in a challenging environment. I like what I see here, but for it to make sense, I want to see this trend continue over the next few years.
Better opportunities elsewhere
Wizz Air clearly faces significant challenges, but its current valuation and growth prospects make it an option that more risk-averse investors should consider. The airline industry is notoriously cyclical, and the company’s position as a low-cost carrier could allow it to benefit disproportionately from a recovery in travel demand.
However, I don't like the company's high debt level and the general volatility of the airline industry. I think there are probably safer investments out there, even though this one has a lot of potential.
