The easyJet (LSE: EZJ) share price has really taken off. Anyone holding this reopening stock has seen the value of their shares rise by 24% this year and by more than 40% over the last 12 months.
The airline is now planning to add more flights from May, in the hope that the vaccinations will rescue the summer holiday season.
However, despite recent gains, easyJet’s share price is still 30% below its pre-pandemic level. I reckon the airline is well positioned for a recovery, so should I buy the shares today? Here’s what I think.
Better than expected
easyJet says its performance during the six months to 31 March was “slightly better than expectations”, due to a lower cash spend than expected.
Although the company only flew 14% of 2019 capacity during the first half of the year, management is planning for a return to more normal levels of flying in May. These optimistic comments have lifted easyJet’s share price by 3% at the time of writing.
Of course, the half-year may have been better than expected, but easyJet is still burning through cash. The airline generated just £235m of revenue during the six-month period, but faced operating costs of £845m.
Even if flying resumes as hoped next month, City analysts still expect easyJet to report a loss of £635m this year.
Well prepared for reopening
When the pandemic struck last year and airlines were grounded, I thought there was a risk that some might run short of cash. No airline has ever faced such a prolonged period without being able to fly normally.
As it’s turned out, airlines like easyJet have not had any difficulty raising the funds they’ve needed. easyJet has raised a total of £5.5bn since the start of the pandemic. That’s more than the group’s current market cap of £4.2bn.
Although much of this money has been spent, easyJet still had access to £2.9bn at the end of March. As a result, I’m confident the airline should be able to return to normal operation without needing any further financial support.
easyJet share price: what I’m doing
Although I think easyJet’s financial situation is safe, this has come at a cost. I expect financing costs to be higher in the future, due to higher lease costs and interest payments.
Shareholders also face dilution. easyJet raised £419m by selling new shares in June last year. This increased the total number of easyJet shares from 397m to 456m. As a result, future profits will be split among a larger number of shares, reducing earnings per share.
For example, the airline’s 2019 profit of £349m resulted in earnings of 88p per share. According to my sums, the same profit today would give earnings of about 76p per share.
This dilution could limit the future recovery of easyJet’s share price. For this reason, I don’t expect the shares to return to the 1,500p level seen in 2019 for the foreseeable future.
Broker consensus forecasts for 2021/22 suggest easyJet will report earnings of about 55p per share. Based on a share price of 950p, that values the airline at more than 17 times forecast earnings.
I think easyJet looks quite fully valued already. I don’t see the current share price as an attractive entry point, so I won’t be buying the shares today.