Long-Term Value Amid Short-Term Turbulence

An easyJet plane takes off from Tegel Airport. (Photo by Bernd von Jutrczenka/picture alliance via Getty Images).

dpa/picture alliance via Getty Images

The easyJet share price (LON:EZJ) has faced further turbulence after a solid Q3 update was overshadowed by a drop in the airline’s near-term outlook. Consequently, the stock has dipped back below 500p – but there’s reason to believe the shares can fly again.

Flying Quarter

Had management reiterated its FY25 guidance – which was absent – I would have no qualms about the easyJet share price flying close to its YTD high by now. This is because the budget operator had quite a stellar quarter. Passenger revenue was up 9.7% to £1.76 billion, while ancillary revenue increased 5.6% to £732 million, and Holidays revenue r0se 27.4% to £428 million. As such, group revenue grew 10.9% to £2.92 billion.

Nonetheless, the timing of Easter in Q3 this year saw ticket yields (passenger RASK) tick up 1.8% to 4.64p. Otherwise, yields would’ve come in slightly down, as has been the case for H1. But it was ultimately the fall in fuel prices that boosted easyJet’s headline EBIT margin by 115bps to 10.04%. The 7.3% decline in fuel unit cost (fuel CASK) to 1.65p was precisely what I forecasted. This resulted in a mere 0.3% increase in fuel costs to £627 million.

Higher costs was still inevitable, however, as bigger capacity, heavier load factors, and more passengers came into play. Not to mention, unit costs excluding fuel (CASK ex. fuel) ended up rising 2.3% to 4.39p from higher navigation fees, wages, and airport costs, offsetting some of the lower fuel cost benefits. Be that as it may, headline pre-tax profit (PBT) realised a healthy uptick of 21.1% to £286 million – in line with what I had predicted, too.

No Reason To Panic

Having said that, investors alike have panicked at the sight of a few clouds, as the somewhat ambiguous guidance let the easyJet share price down. While the company didn’t concretely downgrade its full-year guidance, the highlighting of ATC staff strikes (£15 million impact) and slightly higher fuel costs (£10 million impact) was enough to have analysts pull their PBT estimates back to around £656 million from a previous £697 million.

The language surrounding the other parts of the firm’s guidance wasn’t especially encouraging, either. The board cited some short-term impacts on a few of its longer routes to the Middle East due to the ongoing conflict in the region. But most prominently, they also stated seeing a trend of later bookings in the summer – just as Jet2 did last month – which didn’t do much to shore up investor confidence.

Despite that, I remain confident, and think that the market is pricing in too much gloom. The fact that Q4 forward bookings remain 1.0% higher than last year, an upward adjustment to ASK growth for the year (9.0% from 8.0%), and most promisingly, an imminent upgrade to the group’s Holidays medium-term profit guidance, are all encouraging signals.

Temporary Descent

That said, I have downgraded my PBT estimate for FY25 to £674 million from a previous £701 million to account for the higher fuel and ATC-related costs. But in spite of that, my medium-term estimates have remained unchanged, as I don’t anticipate travel demand to cool for the foreseeable future. In fact, the FTSE 100 constituent mentioned that Q1’26 forward sales are up 1.0% to 19.0%, with Holidays sales already half booked for the quarter as well.

easyJet still has very ambitious goals to achieve. These include hitting a PBT of over £1.00 billion over the medium term, along with a 60.0% uplift to its net book value. Combined with the progress I’ve seen from the budget airline in reducing its winter losses, spearheading ancillary opportunities, and growing its packaged holidays business, I have a high level of conviction that easyJet will reiterate, or even upgrade its outlook in November.

The easyJet share price has gone no where since the start of 2023. Hence, the stock currently has an EV/EBITDA ratio of 2.4, which pales in comparison to its sector (8.4) and adjusted 5-year (4.5) averages. And with earnings projected to grow at a CAGR of 11.9% through to FY27, a PEG of 0.7 against the sector average of 2.3 shows an undervalued proposition waiting to ascend once it gets past the current turbulence. Thus, I reiterate my price target of 730p.