One secret that’s shared by many millionaire investors is that the bulk of their wealth originally came from just one or two big successes.
Between 2011 and 2014, easyJet (LSE: EZJ) was just such an investment. The budget airline’s share price quadrupled from 325p in September 2011 to 1,359p three years later.
Today, easyJet shares are trading at about 1,060p, a level which arguably makes them look cheap.
In this article I’ll be asking whether now is the right time to start buying this airline stock.
Beware the cycle
Budget airlines like easyJet say that their low-cost, high-volume business models mean they will avoid the boom-and-bust cycles that have affected the airline industry in the past.
Despite this, we’re currently seeing the same old themes emerge. Overcapacity in the short-haul market is pushing down ticket prices, but rising fuel and wage bills are lifting costs.
So far we’ve seen the group’s after-tax profits fall from a record of £548m in 2015 to just £358m last year.
Despite this, careful management of costs and well-filled flights still enabled the group to generate an underlying return on capital employed of 14.4% in 2018. That’s a respectable figure, in my opinion.
The right time to buy?
easyJet’s profits have already fallen substantially. Is this the bottom for the company’s share price?
One interesting point that struck me from the airline’s latest analyst presentation is that it’s planning for big changes to its fleet. Today it has 332 aircraft, but by 2023, this number may have risen to 403 or fallen to 283, depending on market conditions.
This flexible planning is impressive, but it also suggests to me a high level of uncertainty about the outlook for the European short-haul market.
As things stand, easyJet’s profits are expected to fall by about 25% this year, before returning to growth next year.
At current levels, the stock trades on 12.5 times forecast earnings with a 4% dividend yield. This might be good value, but I think a true bargain basement share price would need to be below 850p.
Given the uncertain outlook, I’m going to stay on the sidelines for now.
Running out of fizz?
Posh tonic maker Fevertree Drinks (LSE: FEVR) has enjoyed explosive growth in the UK in recent years. The firm’s timing — as gin became popular with younger drinkers — powered profits from £1.3m in 2014 to £61.8m last year.
But growth is slowing. This week’s half-year results showed revenue up by just 13% to £117.3m during the six-month period. Operating profit climbed just 6.6% to £34.8m.
With a 45% market share in the UK pub trade, I suspect Fevertree is getting close to its natural limit in its home market
Overseas pop?
The big hope for growth is overseas, but it’s not yet clear whether European and US drinks will embrace its range of tonics, ginger beers and colas.
Sales growth during the first half was 31% in the USA and 13% in Europe. These numbers are promising, but with sales still growing from low levels, I’m not yet convinced.
The risk for investors is that FEVR stock already trades on 42 times 2019 earnings. So if future growth does disappoint, the share price could have a long way to fall.
Although this stock could double again if US sales take off, I don’t think it’s worth the risk at current levels.