October 24, 2020

At 520p, is the easyJet share price too cheap?

At around 520p, the easyJet (LSE: EZJ) share price looks cheap compared to its trading history. Indeed, at the beginning of the year, shares in the low-cost airline were changing hands for around 1,500p. 

However, the airline group isn’t the same company it was at the beginning of 2020. As such, I believe it’s reasonable to say the business is worth significantly less today than it was at the beginning of the year. 

easyJet share price declines 

In fact, easyJet has had a horrible year. Lockdowns enforced to try and contain the spread of Covid-19 around the world effectively killed off international travel. Even though some limited activity has resumed in the past few months, many consumers are still too afraid to fly.

The company’s latest trading update shows the scale of the devastation. The group expects to report a pre-tax loss of between £815m and £845m in the year to 30 September. It will fly only 25% of last year’s capacity in the final three months of the year, that’s down from 40% over the summer. 

As passenger numbers have collapsed, the company has rushed to find additional funds. It raised more than £2.4bn in cash since the beginning of the pandemic. Shareholders contributed just over £400m of this total. 

Before the pandemic, easyJet had one of the most robust balance sheets in the airline sector. Unfortunately, its financial position has since deteriorated. It had £1.1bn in net debt as of the end of September. By comparison, two years ago, the group had nearly £400m of net cash on its balance sheet. 

What does this mean for the easyJet share price? It’s not good news. The company has had to slash jobs to reduce costs over the past few months. These cost-cutting efforts, coupled with the group’s reduced flying schedule, suggests its profit potential has been severely curtailed.

Analysts don’t expect demand for air travel to return to 2019 levels until these 2025. That indicates the business is in for a rough few years. 

What the future holds 

The big question is, will easyJet ever return to 2019 levels of profitability?

I think this is unlikely in the near term. Even if demand for the company’s services does return to last year’s level, the group’s elevated borrowings may prove to be a drag on profitability. A weak balance sheet will also hurt the low-cost airline’s ability to grow in the future. 

That said, at current levels, even a modest improvement in profitability could be helpful for the easyJet share price. As such, I think the stock does look too cheap, and long-term investors may be able to achieve high total returns buying the shares at current levels.

However, it could be many years before the stock returns to 1,500p. A repeat of this spring’s total lockdowns could mean the company’s recovery is only pushed back. In the meantime, investors might be better off looking elsewhere for growth.

The post At 520p, is the easyJet share price too cheap? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020

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