easyJet (LSE: EZJ) shares have dropped nearly 50% over the last year, undoing the recovery we saw during the first half of 2021.
However, air travel is rapidly getting back to normal, despite some teething problems as airports gear up again. I reckon that easyJet shares are starting to look decent value, so today I’m reviewing the budget airline as a potential buy for my portfolio.
Are easyJet shares safe to buy?
UK airlines are getting a lot of bad press at the moment. But in reality, I think easyJet’s future is fairly safe.
Last year’s £1.2bn rights issue has allowed the group to cut debt and build a health cash buffer.
Although the airline reported a pre-tax loss of £545m for the six months to 31 March, CEO Johan Lundgren is expecting a busy summer. In May, he said easyJet expected flying to reach 97% of 2019 levels during the July-September period this year.
City analysts expect easyJet to report an after-tax profit of £70m for 2021/22, rising to £325m in 2022/23. That’s fairly close to the £349m profit reported in 2018/19, before the pandemic.
The same price as 2019?
Like most airlines, easyJet has changed a lot over the last three years. The airline has cut costs, made changes to its staffing and introduced new add-on services to boost sales.
All of this makes it difficult to value the airline today, in my view. But for me, a good starting point might be the valuation of the business in summer 2019, before the pandemic.
As it happens, easyJet’s current valuation is almost exactly the same as it was three years ago, in June 2019. Back then, the airline was valued at £3.9bn, including debt. Today, the equivalent figure is £3.8bn.
Although easyJet’s share price is lower today than in June 2019, the airline has many more shares in issue, due to last year’s fundraising.
In simple numbers, this means that easyJet shares are trading on around 10 times 2022/23 forecast earnings. That’s the same price-to-earnings ratio the stock had in June 2019.
Should I buy at 415p?
easyJet still faces risks from long-term challenges such as the need to cut emissions. Ultra-low cost rivals such as Ryanair and Wizz Air are also likely to keep pressure on easyJet, which has historically had higher costs.
However, I expect the changes made during the pandemic to make easyJet a more competitive and efficient business.
On balance, I think easyJet shares are probably quite reasonably priced at 415p. There’s also some hope that dividend payments will restart next year. City forecasts suggest a payout of 12.8p per share. That would give a useful 3.1% yield, based on a share price of 415p.
At this stage I think easyJet shares are still slightly riskier than average, for a large company. But I’d be comfortable adding a small slice of the stock to my portfolio today. I think this popular airline will probably look cheap at current levels in a few years’ time.