Could easyJet fly back into the FTSE 100?

Shares in budget airline easyJet (LSE: EZJ) were flying well over 3% higher this morning after the company released a reassuring third-quarter update on trading. It silenced suggestions from some City analysts it would need to lower its forecasts for the full year. 

Thanks to an increase in capacity, a total of 26.4m people flew with the airline over the three months to the end of June (up by 2m), leading to a 10.7% rise in passenger revenue to £1.39bn. The company’s load factor — the percentage of available seats filled — declined slightly to 91.7%, however, due to high prior-year comparatives resulting from the bankruptcy of Monarch and industrial action in France.

Taking into account the 14.3% rise in ancillary revenue (baggage fees and on-board food and services), total revenue came in at £1.76bn in the three months — 11.4% more than over the same period in 2018.

In addition to higher revenue, easyJet’s focus on “operational resilience” seems to be paying off. Its headline cost per seat, excluding fuel, fell 4% at constant currency following significantly-reduced cancellations and delays. No wonder CEO Johan Lundgren was keen to describe the company’s performance over the period as “robust”. 

With 78% of seats in the second half of its financial year now sold, easyJet predicts headline pre-tax profit for the 12 months will come in between £400m and £440m, in line with market expectations. 

In light of this news and following a bounce in the share price over the last month, does it make sense to question whether an immediate return to the market’s top tier might be on the cards for the business? I think that’s a tough one to call. 

Bothersome Brexit 

The last 12 months have not been fun for easyJet’s investors. Even after today’s gain, the stock is still down 40% from the highs reached in June 2018. Nevertheless, with a market-cap still above £4bn, it won’t take much for the company to flirt with the possibility of re-entering the FTSE 100 sooner rather than later, especially if investors see value in the shares.

Before markets opened this morning, the flyer’s stock was trading on a little over 12 times expected earnings — slightly lower than its five-year average of 13.1. This valuation also compares favourably to listed peers Ryanair (14) and Wizz Air (15).

In addition to its lower valuation, easyJet remains the logical choice for those looking to generate income from their portfolios. A predicted cash return of 43.9p per share in the current financial year, covered almost twice by profits, gives a yield of 4.2%. Neither of its rivals pays dividends.

Taking this on board, along with its strong branding and solid finances, I think easyJet could certainly attract interest from market participants in the event of the new Prime Minister reaching what the airline industry considers an ‘acceptable’ conclusion as far as Brexit is concerned.

Whether it’s worth taking a gamble on this happening now given the high chance of further turbulence over the rest of 2019, however, is open to debate. If I were to buy today, I’d certainly be checking my portfolio was suitably diversified — by geography and sector — before pulling the trigger.

If no compromise is reached on our EU departure then easyJet will surely remain in the FTSE 250 for the foreseeable future.