Despite ongoing turbulence, easyjet’s share price is poised to soar – so keep investing

The airline’s operating environment is likely to improve significantly over the long run as the cost of living crisis eases

‘Easyjet’s discounted valuation includes a margin of safety in case the industry experiences further difficulties’

Investors in easyjet have experienced an extremely turbulent ride since Questor first tipped the company in July 2017. The budget airline has encountered a variety of unforeseen challenges, including the pandemic and the cost of living crisis, that have weighed on its financial and share price performance. As a result, its shares currently trade 61pc lower than when this column first recommended their purchase.

The company’s latest trading update, released last month, showed that its operating environment remained uncertain. Elevated geopolitical risk in the Middle East caused a temporary slowdown in flight bookings across the industry. This contributed to the company reporting only a modest narrowing of headline pre-tax losses in the first quarter of its financial year: they amounted to £126m, against £133m in the same period of the previous year. In the first half of the current year, conflict in the Middle East is expected to cost the company £40m in total.

While this is clearly disappointing, investors appear to be looking beyond such risks. Easyjet’s shares have surged by 10pc in the past month as market sentiment towards cyclical companies improves.

Indeed, consumer spending is expected to rise because wage growth is now consistently ahead of inflation. And with interest rate cuts widely expected over the coming months, demand for discretionary products and services such as annual or six-monthly holidays is likely to rise as mortgage costs fall and economic growth improves.

Already, passenger growth amounted to 14pc in the first quarter of easyjet’s current financial year. Revenue per seat rose by 3pc, which was largely because of higher sales of ancillary services such as additional baggage and seat selection. Meanwhile, costs per seat, excluding fuel, fell by 3pc year-on-year as a result of the airline’s productivity measures.

Encouragingly, profits at easyjet’s package holiday division rose from £13m to £30m year-on-year as customer numbers rose by 48pc. Although it expects this rate of growth to moderate, the company still predicts a rise in customer numbers of 35pc in the current year. Given that package holidays are relatively resilient, since consumers have historically viewed them as good value for money, the growth of easyjet’s holiday arm could help to stabilise the company’s overall performance in the long run.

In the short term, the company expects to achieve capacity growth of 9pc in the current year. It also forecasts that losses will continue to narrow in the first half of the year. Its load factor is expected to rise in the second half of the year following a decline of one percentage point to 86pc in the first quarter.

Ultimately, the operating environment for airlines such as easyjet is highly likely to improve. In Europe, for example, passenger numbers across the industry as a percentage of 2019 levels are expected to rise from 102pc last year to 108pc this year. In 2025 they are forecast to increase further to 115pc of their pre-pandemic levels. And between 2019 and 2040, passenger numbers in Europe are expected to increase by 700m.

In the meantime, the company’s relatively sound financial position makes it well placed to overcome temporary challenges. At the end of its 2023 financial year in September, for example, it had net cash of £41m and unrestricted access to funds of £4.7bn.

In the current financial year, the company is forecast to deliver earnings growth of about 36pc. This is expected to be followed by growth of more than 12pc next year. Given that its shares trade at 12.2 times earnings, they have significant scope for capital growth on the basis of current financial guidance. Easyjet’s discounted market valuation also includes a margin of safety in case the airline industry experiences further difficulties.

Now that the effects of the pandemic have faded and the cost of living crisis is coming to an end, the outlook for easyjet is upbeat.

It is well placed to benefit from growing demand as passenger numbers increase, while its solid financial position and low valuation mean it continues to offer investment appeal.

Further share price turbulence is almost certain. But in Questor’s view it is a price well worth paying for the prospect of significant capital growth. Keep buying.

Questor says: buy

Ticker: EZJ

Share price at close: 553.4p