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With easyJet crashing out of the FTSE 100, what next for the share price?

Andy Ross
An airplane on a runway

The airline easyJet (LSE: EZJ) lost its place in the FTSE 100 this week along with generic drug producer Hikma Pharmaceuticals. With easyJet’s market capitalisation (basically the value of the company) sitting at five-year lows, the company became too small to be included in the index. But what could that mean for investors?

Airline issues

easyJet is not the only airline that is struggling at the moment however, which is good news for its investors because it means the demotion to the FTSE 250 is not reflective of specific problems at the company itself. Other airlines groups are struggling and have seen their share prices fall. Shares in International Consolidated Airlines, the owner of BA, have fallen by around 22% so far in 2019. Shares in easyJet have actually fallen a little less than that, having dropped by around 20% over the same period. 

All industries go through phases when investors are less keen on their prospects. Legendary investor Warren Buffett recommends being greedy and buying shares when others are fearful, meaning now may well be an opportune time to look at easyJet. Challenges such as Brexit and overcapacity within the airline industry are certainly creating worries for investors, but over the longer term, these ought to be minor blips rather than fundamental threats to companies in the industry.

The airline has warned of tougher trading conditions and on top of that the airline’s first-half results showed losses tripled compared to the previous year. However, the last set of full-year results showed profit before tax increased by an impressive 15.6%, indicating that easyJet is still in good financial shape, despite the falling share price. With the shares now offering a very generous 6.5% yield and the P/E at a very low 7.5, it offers investors a degree of protection against any further bad news – should there even be any.

Hitting new heights

Of course, you may be more inclined to tap into a share on the way up, in which case Aveva (LSE: AVV) may be more tempting. Shares in the software company have rocketed up over 58% so far this year. Strong performance in its last financial year, the first since it merged with the software arm of French energy group Schneider Electric in late 2017, has helped to boost the shares. For the 12 months that ended in March, the now much larger group, saw revenues increase by 11.9% to £775.2m and there was a 19.8% rise in adjusted earnings (EBIT) to £184.5m.

Investors have cottoned on to this high growth opportunity and so the shares are not cheap. The shares trade on a P/E ratio of over 39 while the yield is a tiny 1.1%, which is less than the rate of inflation. This means the shares need to keep growing or investors are going to lose out. The company may be able to keep up the good run, but given how expensive the stock is, it may be too risky to grab a slice of this up-and-coming company.

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

Motley Fool UK 2019