Why Easyjet could turn out to be a shrewd investment

At the time of writing, Easyjet is trading at a price of approximately £13 per share. Its 3-year average adjusted earnings per share gives a retrospective PE ratio of 10.7, which suggests the equity is cheap (compared to a FTSE 100 average of 22).

In addition it has a dividend policy of paying out 50% of its net profits, which means dividends will be volatile. Analysts’ estimates of net profits average out to around £400m, which will mean a dividend cut to around 50p per share, leading to a yield of 3.8%, which is reasonable although unspectacular.

 

However, recent events could very much work to Easyjet’s advantage. For starters Ryanair’s shambolic handling of its pilots’ holiday plans causing the cancellation of flights for 700,000 passengers has lead to very unsavory front page headlines for the airliner, which will likely put off several passengers going forward. In addition to this Monarch Airlines, Britain’s 5th biggest airline has collapsed, leaving a sizeable market share up for grabs. Easyjet is in pole position as it has gone through 2017 scandal-free.

 

Easyjet is not without its challenges. Investors are understandably worried about the sustainability of the airline’s business in Western Europe, which is its primary focus. Brexit negotiations are still ongoing and we are no closer to knowing what sort of deal Britain will have with the EU. However, Easyjet plans to obtain an Air Operator Certificate, which will look to secure its right to operate in Europe although this is expected to cost £10m over 2 years.

Currency movements are also a worry, though the pound has rebounded from its post Brexit lows, which will lessen the effects of oil prices on the airline’s bottom line. Finally, Caroline McCall has done a superb job as CEO, and her departure provides an interim period of uncertainly as the airline searches for a suitable replacement to take the company forward.

 

Easyjet is arguably the most popular go to airline for tourists wanting a cheap trip abroad, and the planes typically fly at full capacity reducing wastage. It has a very big presence in Europe, being the second largest short-haul airline in Switzerland and France, and the largest in Britain. I think recent events provide a great opportunity for investors to experience capital growth in the airline, especially if it takes full advantage of the chaos amid its competitors and increases its asset value, which should translate into a larger market cap and hence higher share price.

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