I’m sorely tempted to buy easyJet (LSE: EZJ) shares, which look irresistibly cheap trading at 9.54 times trailing earnings. That’s well below the FTSE 100 average of 15.4 times. It’s an exciting opportunity, but there are dangers too.
Recent investors have had a miserable time, with the easyJet share price plunging 44.19% over five years. If I’d invested £5k in August 2019, I would have picked up around 650 shares at the prevailing price of 769.51p per share. Today, those shares would be just 435p each.
I wouldn’t have received much income to soothe my pain either. In 2019, EasyJet paid a dividend per share of 36.9p. I’d have got £239, paid in March 2020.
FTSE 100 struggler
Then the pandemic struck, grounding fleets worldwide, and easyJet didn’t pay another dividend for four years. The board finally restored payouts at 4.5p per share. It would have paid me £29.25 in March this year. Today my £5k would be worth just £3,096 including dividends, a drop of 38.66%.
Luckily, I didn’t buy the stock five years ago. So does it offer a brilliant cut-price buying opportunity today?
The easyJet share price is falling again, down 22.42% in the last six months. Over one year, it’s up a meagre 1.57%. It certainly hasn’t clicked into recovery mode yet.
That’s despite posting a 16% increase in headline profit before tax to £236m on 24 July. Passenger numbers rose 8% although its key revenue per seat metric edged up just 1%.
The group’s easyJet Holidays division did well, with profit before tax soaring 49% to £73m. With flight capacity up and disruption costs down by a third, the outlooks is promising. So why aren’t the shares flying?
Dividend income again
Investors have grown wary of airline sector volatility. Carriers are vulnerable to war, recession, weather, pandemics, industrial action, volcanoes and just about everything else the world can throw at us.
Airlines have huge fixed costs, running large fleets of planes that need servicing even if they’re not flying. Staff can’t simply be sacked and rehired whenever it suits.
When one airline takes a hit, investors assume others will struggle too. So when Ryanair warned on 22 July that falling fares would hit profits, easyJet shared in its pain.
Yet easyJet looks increasingly solid, with a net cash position of £456m. That’s up from £146m at the end of March. The economy is picking up, and falling interest rates should put more money into people’s pockets. Plus everyone loves a holiday.
EasyJet is increasing capacity and sales, and driving revenue growth from extras such as baggage, legroom and food. I think today offers a buying opportunity. The yield is still a low at just 1.03% but that should rise in time. I’ll buy easyJet shsares when I have the cash. Better today than five years ago. I’d call it a bumpy buy.
