Key points
- A Covid recovery is evident in the travel industry
- easyJet is bouncing back quicker than some competitors
- The share price is undervalued compared to the aviation sector
No airline has escaped the battering of the Covid-19 pandemic. From March 2020, passenger numbers metaphorically fell of a cliff. The easyJet (LSE: EZJ) share price fell two-thirds on the outbreak. Nearly two years on, has anything really changed? Is a recovery now really on the cards? Here’s why I think easyJet shares are cheap and why I’ll be snapping them up without delay. Let’s take a closer look.
The easyJet share price and the Covid recovery
Only this month, a number of countries including Denmark and Norway opened their borders again. By these rules, fully vaccinated travellers will be able to travel smoothly from the UK and back. These Scandinavian countries joined many others in continental Europe that had already opened up.
We can observe this recovery effect in easyJet’s recent trading update from December 2021. It shows that company losses halved for the three months up to 31 December 2021 compared to the same period in 2020. This trend implies that company fundamentals are travelling in the right direction. With this in mind, I think the future uptake in international travel suggests the current easyJet share price is a bargain at just half of its pre-pandemic levels.
What’s more, revenue also increased during those three months. In the report, revenue grew to £805m. This marked a nearly 500% rise compared with the same period in 2020. This tells me that passengers are beginning to travel on aircraft again. This increased travel stems from more open borders and better passenger confidence in pandemic flying.
The real benchmark of recovery in the easyJet share price, however, is passenger capacity levels. These are also up as per the December update. During this time, capacity was 11.9m compared with the 2020 rate of 2.9m. While competitors, like Wizz Air, also reported a 243.4% increase in passenger numbers for the final three months of 2021, easyJet still outperformed. Its passenger growth stands at around 410%.
So, is it really dirt cheap?
A good marker for gauging the cheapness of a particular stock is the price-to-earnings (P/E) ratio. At the current time easyJet has a forward P/E ratio, based on forecast earnings, of around 13. Within the aviation sector, however, the average P/E ratio is 20. For me, this indicates that the easyJet share price is a bargain at current levels.
Investment banking firm Stifel agrees. Just last week, it upgraded easyJet to ‘buy’ and hiked its target price to 750p from 600p. Part of its justification was the expansion and success of easyJet holidays, and “positive momentum into the summer”. It is worth noting that the unpredictable nature of Covid-19 could disrupt this recovery in 2022 and set back some of the progress that has been made. As long as no other serious Covid variants emerge, however, I do think the easyJet share price is dirt cheap.
All of the figures, from revenue to passenger numbers, are heading in the right direction. A recovery is truly on the cards. What’s more, the shares are cheap. I will be buying easyJet stock now.
Andrew Woods 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.
