FTSE 250 budget airline Wizz Air (LSE: WIZZ) has had a torrid time in the past 12 months.
As a result, its share price has dropped 38% from its 12 June traded high of £25.46 over the period.
However, I think the stock might be at a tipping point that may see its valuation surge.
Why is the price down in the first place?
The share price slide began in June on news that 46 of its planes were grounded due to engine issues. That constitutes around a fifth of its fleet.
Consequently, Q1 of its fiscal year 2025 saw operating profit drop 44% year on year to €44.6m (£371.m). The profit forecast for full-year 2025 was cut from €450m to €350m.
This was downgraded again shortly after to €250m and once more in the 30 January Q3 results. The new profit after tax forecast range of €125m-€175m resulted from unrealised foreign exchange losses.
Inadequate currency risk hedging practices and engine problems remain key risks for Wizz Air, in my view.
Where’s my optimism coming from?
The firm signed a new commercial support agreement with engine maker Pratt & Whitney at the end of 2024. This will cover direct costs associated with the aircraft that have been grounded and those expected to be.
Wizz Air additionally expects negotiations over spare engines for its 177 Airbus A321neo planes to be concluded by the end of this quarter.
And it has also approved a new programme to hedge its currency risks.
Positively as well, its Q3 2025 results saw revenue increase 10.5% to €1.18bn. Passenger numbers increased 2.6% to 15.5m and its load factor rose 3% to 90.3%. The higher the load factor, the more efficiently an airline is utilising its seating capacity.
Good for growth is that it is restarting operations into Israel from March. Indeed, expanding its routes and flight frequency is one reason why HSBC upgraded the stock to Buy from Hold on 7 February.
HSBC analysts believe Wizz Air’s strategy of network densification will drive operational efficiencies.
In fact, consensus analysts’ forecasts are that Wizz Air’s earnings will increase by a stellar 31% a year to end-2027.
And it is this growth that ultimately drives a firm’s share price higher.
How undervalued is the stock?
On the key price-to-sales relative stock valuation measure, Wizz Air currently trades at just 0.4. This is joint bottom of its key competitors, which average 0.9.
Moreover, a discounted cash flow valuation using other analysts’ figures and my own shows Wizz Air shares are 67% undervalued at their current £15.78 price.
So, the fair value for the stock is technically £47.81. It last reached this price on 11 February 2022, although market vagaries may push it lower or higher, of course.
Is now the time for to buy it?
If I were not towards the latter part of my investment cycle focusing on high-yield stocks I would probably buy Wizz Air shares.
The forecast very high earnings growth should drive the share price higher over time, I think. It should also allow it to start paying dividends at some point.
This post was originally published on Motley Fool
