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FTSE 250 airline easyJet (LSE:EZJ) has seen its share price soar again recently. At 487 pence per share, the economic prospectus is now 25% more expensive than three months ago.
However, today it is still trading at a huge discount to the £14.90 its shares were valued at pre-pandemic four years ago. So should you buy easyJet shares in anticipation of further substantial price rises?
Flying high
The Luton company is one of many major airlines capitalizing on the industry's strong recovery from the pandemic.
The 82.8 million passengers it carried during the last financial year (to September 2023) represented a sharp increase on the previous year's 69.7 million as it increased capacity. It is now targeting its all-time high of 96.1 million, reached before Covid-19.
Mark Crouch of eToro has suggested that “easyJet's final results suggest it (the pandemic) is now ancient history“. Given the company's record second-half profits, this optimism can be easily explained.
It helped the airline make a pre-tax profit of £455m for the full year, against a loss of £178m in the previous 12 months.
Further to go?
So how far can the easyJet share price go? Well City analysts do not think it will approach pre-pandemic peaks of around £15 in the near future.
Today, the airline has an average price target of 646 pence per share. This is based on predictions from 19 analysts who rated the stock.
However, this does not suggest there is anything fundamentally wrong with the FTSE 250 company. It simply reflects the massive dilution of easyJet shares as the company raised cash to stay afloat.
The number of shares outstanding currently stands at 753.1 million, a big increase from 397 million just before the pandemic.
Problems in the future
If brokers' price targets prove accurate, I could lock in a 33% return on my cash by buying shares today. And that excludes the boost provided by any future dividend payments (the company reinstated its payout policy last year).
But those attractive share prices suggest that trading conditions will remain extremely favorable. My concern is that the airline faces serious obstacles that could cause its recovery to lose steam.
On the one hand, companies in the travel and leisure sector (even those operating at the value end of the market) could see a sharp drop in revenue. Economic conditions remain extremely difficult in easyJet's European markets. A broad pickup in most recent inflation also adds more reasons to be cautious.
Rising tensions in the Middle East present an additional significant threat. This could not only drive up fuel costs if crude oil prices rise on supply fears. Airlines could also be forced to close more routes (they have already suspended flights to Israel in recent weeks).
Finally, the company must also overcome high levels of competition, a long-standing problem in the airline industry. Just this week Ryanair announced a major expansion of its London operations for the summer season.
Looking for other actions
Today, easyJet shares trade on a forward price-to-earnings (P/E) ratio of 8.9 times. It is a very low valuation that reflects the significant risks it faces from now on.
Considering all this, I'd rather look for other UK stocks to buy right now.
