My wife’s taking her annual trip abroad with her friends. This year they’ve booked a package holiday. The plane was full and the resort is busy with holidaymakers. This makes me ask whether now’s the time to buy easyJet (LSE:EZJ) shares.
Up in the air
There’s an old joke that if you get two economists in a room, you’ll hear four different opinions. It’s a bit like that when it comes to choosing shares. Investors and analysts have differing views on the relative merits of individual stocks, and sometimes it’s difficult to cut through all the noise.
To overcome this, I like to compare my target stock with another in the same industry. And, if possible, one with a similar business model.
With respect to easyJet, the most obvious comparison to make is with Jet2. Both offer flights as well as package holidays, although the latter derives over 70% of its revenues from breaks whereas the figure for its larger rival is less than 10%.
So how should I go about determining whether to invest in easyJet?
The ultimate test
According to McKinsey & Company, the single most important measure for an airline is the return on invested capital (ROIC). It’s calculated by deducting dividends from earnings, and dividing this by debt plus equity.
McKinsey argues that traditional measures of profitability don’t reflect the value of the aircraft that airlines own or lease. It’s a bit like a landlord measuring their profit without taking into account the cost of the buildings.
Financial year
easyJet ROIC (% to 31 March)
Jet2 ROIC (% to 30 September)
2018
+6.07
+5.01
2019
+4.97
+6.51
2020
-8.72
+7.82
2021
-9.37
-11.86
2022
-0.25
-10.37
Source: gurufocus.com
Based on ROIC, it appears as though easyJet is performing better. Jet2’s figures are more recent, and therefore further away from the pandemic, which nearly destroyed the industry. But it still can’t beat its competitor’s ROIC.
However, I find it difficult to get excited about a company that’s making a negative return on its asset base. I therefore need to make a judgement about easyJet’s future prospects.
Flying high?
In May, the company released a trading update for the six months to 31 March 2023. And the update made for positive reading.
Flights are 73% booked in the third quarter of the current financial year, and 36% full for the fourth. This is an increase of one and three percentage points respectively, compared to the same point in 2022.
Revenue per seat for the third quarter is expected to be 20% higher and costs are broadly the same. The airline also has 9% more seats available for sale.
All this data suggests that the company will return to profitability in 2023.
Financial year
Profit/(loss) before tax (£m)
2018
445
2019
430
2020
(1,273)
2021
(1,036)
2022
(208)
A negative point is that the company last paid a dividend in March 2020. But there might be a small payout for 2023, if the company makes a profit this year.
Although easyJet faces a number of challenges that are outside its control — expensive fuel, rising interest rates, and strikes, to name a few — I’d be happy to include the stock in my portfolio. Revenue and earnings are moving in the right direction and I view it as a long-term growth stock.
Unfortunately, I don’t have any spare cash available at the moment to buy shares in the airline. But if my wife took fewer holidays, our family finances might be in better shape — only joking, my dear!
The post My wife’s just left me! Time to buy EasyJet shares? appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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More reading
Forget easyJet shares! I’m buying this travel stock instead
Have easyJet shares got further to fly?
Has the easyJet share price peaked?
James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.