The easyJet (LSE:EZJ) share price has nosedived recently. Back in April, it was hovering around the 575p mark. Today, it’s at 430p – about 25% lower.
Is the share price a bargain at current levels? Let’s discuss.
Low P/E ratio
At first glance, shares in the budget airline do appear to be in bargain territory.
Currently, City analysts expect easyJet to generate earnings per share (EPS) of 65.8p this financial year (ending 30 September). So, at today’s share price, the forward-looking price-to-earnings (P/E) ratio is just seven.
That’s miles below the UK market average (about 14).
Forecasts could be too optimistic
The thing is though, that EPS forecast could turn out to be too high.
Right now, conditions in the European budget airline space appear to be deteriorating. This was illustrated yesterday (22 July) when rival Ryanair posted a 46% year-on-year drop in post-tax profit for the April to June quarter (its Q1) and missed analysts’ estimates.
Looking ahead, Ryanair warned that fares for the key summer months would be “materially lower” than last year due to the fact that customers are baulking at high ticket prices. So, I imagine easyJet will be looking at lower fares in the months ahead too (lower prices from Ryanair will put pressure on easyJet to reduce its prices).
Lower fares over the summer months are likely to lead to lower-than-expected earnings for this financial year. So, the shares may not be as cheap as they look at present.
We should get more clarity on the near-term outlook tomorrow (24 July), when easyJet posts its Q3 results.
Long-term outlook
What about in the longer term though? Could the shares turn out to be a bargain taking a five- or 10-year view?
Well, there’s a chance they could. After all, they’re well off their highs right now. But there’s also a chance that they could turn out to be a disappointing long-term investment.
While the long-term outlook for the travel industry as a whole looks attractive, there’s always some uncertainty when it comes to airlines. That’s because there are a lot of things that can go wrong for these companies (oil price spikes, staff strikes, geopolitical conflict and more).
Even when the travel industry is booming, there’s no guarantee that airline stocks will make investors money. Just look at share prices today – we’ve just come off an 18-month boom in travel where people were desperate to travel and easyJet’s share price hasn’t gone anywhere.
I’m not buying
Given the turbulent nature of airline stocks, I don’t plan to buy the shares myself any time soon. To me, they’re too much of a gamble.
I’m bullish on the broader travel industry though. I’m playing this through stocks such as hotel operator IHG, home rental business Airbnb, rideshare company Uber, and payments giants Mastercard and Visa – all of which have better long-term track records when it comes to generating long-term shareholder wealth than easyJet.
This post was originally published on Motley Fool
