Since August, the easyJet (LSE: EZJ) share price has been flying. Near 573p, it’s up by around 35%.
However, that good performance masks a weaker trend for the whole of 2024. Since January, the move higher has been about 15%. Just like many cyclical stocks, the airline has been volatile.
The beta metric that measures volatility is a high-looking 3.5. A reading of one represents the volatility of the general market, such as the FTSE All-Share index. So that means easyJet’s stock volatility has been on average three-and-a-half times that of the general market.
Therefore, every time some piece of macro-economic news comes along and rocks the market either up or down, easyJet tends to exaggerate the move. So it can be a bit of a white-knuckle stock.
Good trading
But despite all the wiggling about, the underlying business has been delivering a steady and positive performance. After the crash in earnings in 2020 when the pandemic struck, losses reduced in 2021 and 2022. Then there was a surging rebound in earnings during 2023 and 2024.
Looking ahead, City analysts expect a further increase of about 11% for the trading year to September 2025 and a mid-single-digit percentage increase the following year. So it looks like the rate of earnings growth is reducing going forward.
Will the stock get back to £10 in 2025? After all, the share price was higher and plummeted down through that level in 2020 when Covid-19 arrived.
Near 572p now, the forward-looking price-to-earnings (P/E) rating for next year is about 7.6. But easyJet was on a higher valuation in January 2020 of about 14. If the stock can re-rate back to that level, the implied stock price is about £10.50 based on current analyst’s estimates for earnings.
So theoretically, £10 next year is feasible. But the big question is, does a high-beta stock backed by a volatile and cyclical business deserve a rating as high as it was before the pandemic?
A positive outlook
Shareholders will remember the anguish of coronavirus and perhaps never again bid up the stock to such heights. After all, there’s a lot that can affect airline and holiday businesses, such as aviation fuel prices, wars, pestilence, energy shocks and other things.
The stock carries a lot of risk for investors and will never be one to buy and forget. One argument is that the business deserves a lower valuation because of the risk it carries.
Nevertheless, trading has been going well and easyJet posted a 34% increase in annual profits for the trading year to September 2024.
Chief executive Johan Lundgren said the positive outcome occurred because of the firm’s effective strategy. There was also strong demand for the flights and holidays offered by the business.
Looking ahead, Lundgren said the year’s trading was a big step towards the directors’ goal of generating over £1bn of annual profit before tax.
Cyclical enterprises like this can grow as well as being volatile. So I reckon £10 per share is achievable. However, that level is not guaranteed and neither is the time frame or certainty of achieving it. For me, it’s one to consider, but with caution!
This post was originally published on Motley Fool
