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easyJet (LSE:EZJ) shares took a hit last week. This was despite the fact that the airline announced that it will make a record pre-tax profit in the fourth quarter.
Should I jump in and buy some shares thanks to the company’s growing earnings? Let’s discuss.
Record profits
A trading update from the company on Thursday (Oct 12) showed that trading performance has been decent lately.
For the quarter ended September 30, passenger growth increased 8% year-over-year and revenue per seat (RPS) increased 9% (guidance here was 10%).
Thanks to this strong passenger and RPS growth, the company expects to make a record fourth quarter pre-tax profit of between £650 million and £670 million.
Looking ahead, easyJet said it was setting ambitious new medium-term targets and plans to resume its dividend (although it will be relatively small).
It also said it plans to purchase more than 150 new aircraft for delivery between fiscal 2029 and fiscal 2034.
Cloudy outlook
While easyJet’s recent performance has certainly been strong, I have some concerns going forward. In my opinion, the outlook for airlines has deteriorated significantly in recent months.
For starters, it has become clear that interest rates are going to be higher for longer. This will have implications for consumer spending. Will consumers continue to spend on flights? It’s hard to know.
Second, oil prices have skyrocketed. This significantly increases fuel costs for airlines. easyJet noted last week that its fuel cost per seat in pounds sterling rose by a whopping 24% year-on-year.
Thirdly, we have the terrible events in Israel. There is a possibility that this will affect the enthusiasm for traveling in Europe.
What worries me here is that the last few years have been an absolute bonanza for airlines, as consumers have been desperate to travel (and willing to pay very high prices for tickets).
However, easyJet shares have still struggled. Since the beginning of 2022, they are down 30%.
If they couldn’t make big profits in that kind of environment, when will they?
Low rating
Now, it’s worth noting that the stock has a relatively low valuation currently. For the current financial year (ending September 30, 2024), analysts expect easyJet to generate earnings per share of 56.9 pence.
That puts the stock at a forward price-to-earnings (P/E) ratio of around seven, well below the market average.
But I think the low valuation is proportional to the risks here.
Generally speaking, airlines are very risky stocks (because there are so many things that can go wrong) and tend to be poor long-term investments. Professional money managers know this and usually stay away from them.
Given the bleak outlook here, I won’t be rushing to buy easyJet shares for my portfolio.
Considering all this, I think there are much better stocks to buy today.
