The dirt cheap easyJet share price is staring me in the face

I’ve been keeping a close eye on the easyJet (LSE: EZJ) share price lately. It’s easy enough to spot. It hasn’t exactly been whizzing around.

While rival International Airlines Group (LSE: IAG) jumped another 9% on February (28 February) easyJet’s struggling to make headway, up just 2% last month. 

Over one year, the IAG share price is up a dizzying 130% while easyJet fell 7%. And it’s down 45% over five years.

Given that the budget carrier trades on a dirt cheap price-to-earnings (P/E) ratio of just 8.2, surely it should be taking off. But no. It’s stuck on the tarmac.

Can the FTSE 100 stock play catch up?

I’ve been tempted to buy easyJet more than once. But every time I check its performance, I breathe a sigh of relief that I haven’t. The airline released its Q1 update on 22 January, and it was a mixed bag.

Passenger numbers rose 7% and group revenues climbed 13% to £2.04bn. But revenue per seat came in slightly below expectations at £74.36, when analysts had hoped for £75. Worse, it posted a loss before tax of £61m. Even though that was big improvement on the previous year’s £126m loss, investors weren’t thrilled.

So why is easyJet struggling while IAG’s flying high? One issue is that easyJet relies heavily on the European short-haul market, which remains ultra-competitive and exposed to economic uncertainty. The European economy isn’t exactly flying.

People are feeling the pinch from inflation, and budget-conscious consumers may be opting for even cheaper alternatives like Ryanair.

IAG, on the other hand, benefits from lucrative long-haul routes and premium-class passengers who are less price-sensitive. Business travel has rebounded, and that’s helping to drive its margins. easyJet doesn’t have that luxury.

That said, there are reasons to be optimistic. Its holiday division, easyJet Holidays, is growing fast, delivering a profit of £43m in Q1, up £12m year-on-year. 

It won’t be an easy ride

The board’s also planning to increase capacity by 8% to 103m seats this year. If demand holds up, that could help it claw back some lost ground.

At some point, the market might wake up to easyJet’s valuation gap. It looks incredibly cheap for a company with strong brand recognition, solid balance sheet and a growing holiday business. 

But just because a share is cheap doesn’t mean it’s going places. If economic conditions worsen and demand softens, it could stay cheap for some time.

Incredibly, IAG’s P/E is actually lower at 7.4 times. Plus it has momentum on its side. With a strong earnings outlook and investors continuing to back it, there’s no sign of turbulence yet. Maybe that’s the one I should be buying.

So am I finally going to buy easyJet shares? I feel like the opportunity is staring me in the face. This looks like an exciting growth opportunity, but I also fear I’m missing something. Stocks aren’t cheap for no reason. Plus IAG looks like it could have further to fly. There’s an easy solution of course. Split the difference between the two.

Some might call that cowardice. I prefer the word diversification. I’ll buy easyJet and IAG as soon as I get some cash in my trading account.

This post was originally published on Motley Fool