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easyJet shares are up 55% – is this FTSE high flyer a buy?

A pastel colored growing graph with rising rocket.

Having started the year on the front foot, easyJet (LSE:EZJ) shares soared after yesterday’s excellent Q1 trading update. As a result, the stock is now up 55% in less than a month. Even so, I still don’t think it’s too late for me to buy.

Thrusting higher

Based on current high levels of demand and strong bookings, easyJet anticipates beating the current market profit expectations for FY23.

easyJet CEO Johan Lundgren

That was enough to send the share price flying 10%. The company reported one of the best trading updates I’ve seen anywhere in the last two years, and even beat some of its initial guidance.

Metrics Q1 2023 Q1 2022 Change
Passengers flown 17.5m 11.9m 47%
Load factor 87% 77% 10%
Capacity (seats flown) 20.2m 15.5m 30%
Peak operating aircraft 313 231 35%
Data source: easyJet

The airline impressed on the financial front too. Revenue per seat, Ancillary, and Holidays revenues all beat initial expectations. This now extends its streak of positive EBITDAR to three consecutive quarters.

Metrics Q1 2023 Q1 2022 Change
Passenger revenue £975m £547m 78%
Ancillary revenue £406m £230m 77%
Holidays revenue £93m £28m 232%
Total revenue £1.47bn £0.81bn 83%
Headline EBITDAR £42m -£42m 200%
Profit before tax (PBT) -£133m -£213m 38%
Data source: easyJet

Consequently, the board upgraded the outlook. It’s now expecting both half-year and full-year PBT to be “significantly better” than analysts’ consensus.

Not at cruising altitude yet

easyJet still has a long way to go to fulfil its potential, and that’s down to its new Holidays business. Due to growing demand for its package service, management is now anticipating a total of 1.52m customers by the end of the year, compared to the previously guided 1.43m.

Additionally, CEO Johan Lundgren reported excellent bookings momentum. Those Holidays packages are 60% booked for the summer, and there’s already a 24% increase in flight bookings for Q3 compared to pre-pandemic levels.

Moreover, the launch of 11 new routes to popular destinations like Paris, Naples, and Amsterdam should encourage higher passenger numbers. Combine that with the arrival of 75 more fuel-efficient Airbus A320/1 NEOs by the end of 2023, and I’m expecting some bottom line improvement as well.

The route to cruising altitude isn’t without turbulence though. Fuel prices remain at elevated levels and are eating away at margins. In fact, fuel costs per seat rose by another 18% last quarter. In response, the group increased the amount of fuel it’s hedging, as spot prices saw a $100 increases per MT since last quarter.

Jet Fuel Price.
Data source: IATA

No longer budget-friendly?

Nonetheless, I’m still a big fan of the budget airline’s balance sheet, which is one of the best in the industry. The conglomerate even reported an improvement to its financials last quarter, as net debt decreased by £0.1bn.

easyJet Financials.
Data source: easyJet

Having said that, are easyJet shares still cheap? Well, considering its lagging valuation multiples, one could argue that it is.

Metrics Valuation multiples Industry average
Price-to-sales (P/S) ratio 0.7 0.9
Price-to-book (P/B) ratio 1.7 1.8
Enterprise value-to-EBITDA 7.0 11.0
Data source: YCharts, Simply Wall St

However, when considering its forward multiples, the shares start to look a little more expensive. My current model translates a conservative earnings per share (EPS) figure of £0.17 to a forward P/E of 30.3 at its current share price. This is much higher than easyJet’s long-term average P/E of 18.

Projected metrics 1-year forecast
Net income £130m
Common shares 758m
EPS (130m➗758m) = £0.17
Current share price £5.15
Forward P/E (£5.150.17) = 30.3
Data source: easyJet, Financial Times

But for FY24, assuming it achieves a consensus EPS of £0.35, the two-year forward P/E comes down to 14.7. Although not the cheapest, it’s still a buy for me, given its long-term upside. After all, brokers Liberium and Deutsche are bullish on European airlines due to a “strong pricing environment”. For those reasons, I’ll be buying more easyJet shares before they potentially get even more expensive.

Projected metrics 2-year forecast
EPS £0.35
Current share price £5.15
2-year forward P/E (£5.15➗0.35) = 14.7
Data source: easyJet, Financial Times

The post easyJet shares are up 55% – is this FTSE high flyer a buy? appeared first on The Motley Fool UK.

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John Choong has positions in easyJet Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.