It’s been a turbulent year for easyJet (LSE: EZJ), to say the least. In March 2020, easyJet shares lost over two-thirds of their value thanks to lockdown measures in response to the Covid-19 pandemic. Although many of these measures remain in place, the easyJet share price has since doubled. At the time of writing, the share price stands at 946p, still over 50% below its pre-pandemic price. This has prompted many to wonder whether easyJet shares are a buy as the economy starts to recover from the pandemic.
The bull case
The investment case for easyJet is simple. As the effects of the pandemic subside and economies begin to open up, air travel will boom and airlines such as easyJet will cash in. Although the exact timing of such a recovery is uncertain, the acceleration of vaccine rollouts across the world make a return to normal in the relatively near term more and more likely.
easyJet also has a decent balance sheet. True the company has more than tripled its net debt position to £1.1bn over the last year. But at just 2.4 times 2019 operating income it is still by no stretch unmanageable.
Another thing easyJet has going for it is its strong competitive position. Currently, the company is the number one or two airline brand in the UK, France, and Switzerland and has the number one or two position at 56 primary airports.
Combined, these factors should help the company weather the current storm and allow it to emerge from the pandemic in a strong position, potentially even taking market share away from competitors. If such a scenario does play out, the easyJet share price is likely to do very well.
I still won’t be investing
Despite the compelling investment case above, I won’t be buying easyJet shares any time soon. The reason is that I am a long-term investor looking to hold companies for the next decade and maybe longer. This means that I want to own companies that aren’t just going to do well over the next two years. I want them to have the strength and quality to keep performing under “normal” economic conditions. Does easyJet fit this criteria? I don’t think so.
Firstly, the airline industry is highly competitive. Although easyJet has a strong position in the market right now, the high number of competitors and fairly fickle customer base means it isn’t clear whether the company will be able to maintain this position in the long run.
This difficult competitive environment has resulted in historically mediocre operating margins and returns on capital employed. These averaged just 9.8% and 13.2% respectively in the five years before the pandemic. Both have also been trending downwards, which does not bode well for the future.
The second reason why I am not tempted by the easyJet share price is that the company’s free cash flow is too unpredictable. The mark of any good investment is its ability to generate free cash flow. easyJet has been very inconsistent in doing this. It generated significant negative free cash flow in two of the five years preceding the pandemic. Such inconsistency makes it very difficult to predict the company’s future cash flows. This makes easyJet shares uninvestable for me.