This FTSE 250 growth stock has just reported record profits. Time to buy?

Shares in FTSE 250 member Wizz Air (LSE: AIR) were volatile Wednesday morning despite the company posting an extremely positive trading update for the third quarter of its financial year. But they managed to close almost 5% higher after investors had fully digested the report.

Let’s take a look at the most important numbers from yesterday’s statement.

Flying high

The number of passengers carried by Wizz — the largest low-cost airline in Central and Eastern Europe — soared by a little over 23% to 10 million over the last three months of 2019. 

Revenue also rose a stellar 24.6% to €637.3m. Broken down, ticket sales climbed 15.5% to €336.3m and ancillary revenue — that is, cash generated from baggage fees and on-board food and services — increased a stonking 36.7% to €301.1m. 

Profit came in at a record €21.4m, compared to a loss of €21m over the same period in 2018 thanks in part to a reduction in costs that was ahead of expectations. 

The outlook was also positive. Having taken the decision to prioritise reinvestment back into the business, CEO József Váradi believes that Wizz “will grow even faster in the fourth quarter”, so much so that the company saw fit to raise its guidance on full-year net profit from between €335m and €350m to a range of €350m to €355m.

As updates go, it’s hard to find fault with any of the above.

So, it’s worth buying the shares?

Not necessarily. Let’s look at a few reasons why new investors might wish to hold off taking a position. 

Wizz Air’s stock was trading on almost 18 times forecast earnings before the announcement. While clearly not as dear as some other members of the market’s second tier, that’s arguably not cheap for any business in a notoriously cyclical industry.

It is, for example, more expensive than Luton-based rival easyJet, which still trades on a less-demanding P/E of 14, despite its shares having bounced over 60% in value since last summer. 

With its 3.6% forecast yield (based on a 51.3p per share return in FY20), it’s also worth mentioning that FTSE 100 constituent easyJet is the natural choice for income investors. Wizz, in sharp contrast, elects not to return any profits to its owners.

Regardless of valuation or income prospects, one also needs to consider the impact on airlines in general if (and it’s a big ‘if’) China is unable to contain the coronavirus outbreak that has already killed 132 people and resulted some parts of the country being placed in lockdown. Should this come to pass, you can expect markets to take a negative view on all operators in the short term, regardless of whether they fly in affected regions or not.

On the bull side, it might be argued that yesterday’s numbers, combined with the company’s growth strategy could mean the shares continue their positive momentum over the medium-to-long term.

The £3bn cap is, after all, aiming to launch its first airline outside of Europe — Wizz Air Abu Dhabi — in the second half of 2020. What’s more, Wizz posts higher returns on capital and higher operating margins than easyJet and remains in excellent financial health with total cash of €1.5bn at the end of 2019.

Based purely on the business (and not taking into account any turbulence caused by external factors), I continue to think Wizz is worthy of investment, albeit as part of a fully-diversified portfolio.