easyJet (LSE: EZJ) shares have lost 56% of their value over the past 12 months. But we’ve seen slumps before, and they’ve been followed by strong recoveries. Is the same going to happen again?
On the face of it, the reason for the decline appears obvious. But I can’t help wondering if easyJet’s suffering has been unduly harsh.
Air travel was devastated by the pandemic. Now we’re facing soaring inflation that’s leaving people with less cash to spend. And high oil prices are sending the cost of aviation fuel through the roof.
That highlights the main reason I won’t usually invest in airline shares. The companies face external costs that are entirely outside of their control. So when fuel prices soar, they suffer.
Resilience
Saying that, easyJet shares have actually been more resilient this year than I would have predicted. I’d expect the big operators, like International Consolidates Airlines, to be able to handle a fuel crisis with less pain.
But easyJet says it’s 71% hedged for the second half of the year, which is better than I’d expected. And the International Consolidated Airlines share price fall, at 42% over 12 months, isn’t that far behind easyJet’s.
Right now, I think the easyJet share price is backed by a pretty reasonable balance sheet.
At the interim stage at 31 March, easyJet reported a net debt position of £0.6bn. That’s better than the £0.9bn figure at 30 September 2021. And the airline had cash and cash equivalents, plus money market deposits, amounting to approximately £3.5bn. This is a company with a market cap of £3.2bn, so the net debt is only a relatively small proportion of that.
Things are rather different at International Consolidates Airlines. In that case we’re looking at a £5.8bn market cap, but with £10bn of net debt.
No profits now
At this point I’d like to compare the enterprise value metrics for the two companies, which take into account their cash and debt situations. But as easyJet has posted a couple of years of losses, there are no earnings to go on.
It is, though, one of the first things I’ll be looking at when easyJet gets back to profit. But when that might be is tough to estimate.
At interim time, all easyJet could really say is that it aims to be back to pre-pandemic capacity by 2023. And to achieve mid-teen EBITDAR margins “in the medium term.“
Assuming that bottom line EPS might be around half of EBITDAR expectations, I reckon that could mean a P/E of around 6.5 once easyJet gets back to 2019 levels.
That’s a very rough finger-in-the-air guess. But bearing in mind that easyJet shares were on a P/E of 13 in 2019, a doubling does look like a realistic possibility to me.
Turnaround ahead?
I really do think the turnaround point for easyJet might not be too far ahead now. With no real idea when profits might return, though, and with a potentially very troubled holiday season ahead, my uncertainty level is high.
While I see a decent chance of easyJet shares doubling, there are less risky options out there that would attract my cash instead for now.