Warren Buffett was famously wary of investing in airlines saying he wished planes had never been invented as they were an investor’s nightmare, but despite that stance, he now does invest in four American airlines.
Would the London-listed airlines be as attractive to him? London is home to both IAG and easyJet (LSE: EZJ) and I think the latter is looking like it offers good value to potential investors, even if they’re not billionaires like Buffett. The FTSE 100 company combines a strong brand and a good valuation. On top of that, the collapse of smaller airlines such as Monarch, while showing it is a tough industry to succeed in, does also give more market share and pricing power to the industry’s larger companies such as easyJet.
Flying all over the world
One of the positives for investors when investing in a business like easyJet is that it is easy to understand the business model – something the Sage of Omaha approves of. The company flies people around the world. The more seats it fills with paying customers paying a good price and to whom it can sell extras such as food on board, the more money it makes. Flying all over the world and adding new routes to popular destinations gives easyJet more opportunities than smaller airlines to compete on price and to spend on marketing to attract even more new customers.
Despite the headaches of Brexit, fuel prices and latterly a drone closing down Gatwick airport, it has been able to perform well. The company’s first quarter revenues rose 13.7% to £1.3bn, as both ticket sales and ancillary revenues delivered double-digit growth. On top of this, passenger numbers increased by 15.1% to 21.6m in the quarter, which is another encouraging sign. It is always worth keeping an eye on costs, of course, and while the results showed that cost per seat, excluding fuel, rose 1%, the group did incur £10m in costs due to the closure of Gatwick, which accounts for some of the increase.
What it offers investors
Looking at how the company is currently valued, now seems like a good time to buy into the shares. The P/E ratio is a little under 11 with a yield over 4.5%. But the share price is now recovering after tumbling in the second half of 2018, alongside much of the rest of the FTSE 100, so it may not be such a bargain for long.
When it comes to the dividend yield, I am confident investors can expect to see it continue to grow as the company intends to pay out 50% of profits as dividends. As long as profits go up, dividends will too. Risks remain, of course: think higher fuel prices (although most airlines have mechanisms in place to limit the impact), plus Brexit, good UK weather affecting critical summer demand for holidays, or a price war with another low-cost airline such as Ryanair.
Given the current valuation of the company after the share price fall, I think easyJet is potentially a good long-term investment today. The combination of the current low P/E and an above average yield is particularly appealing, especially as we move from the quieter winter months towards easyJet’s far more busy and profitable summer trading period.