I recently wrote a piece looking at whether I’d invest in either IAG or Ryanair. In it, I explained how I felt both stocks were undervalued. As it’s another key competitor in the same industry, I wanted to examine the easyJet (LSE:EZJ) share price. Having taken a closer look, I’m not convinced that it offers me much value at current levels, for several reasons. Here’s what I found.
Not the time to change strategy
Firstly, I don’t agree with the direction that the CEO Johan Lundgren is trying to go. In a recent interview with the FT, he stated that easyJet is going to try and go after “national carriers” such as British Airways and Air France. He isn’t focusing on competing with more budget airlines like Ryanair.
I find this an odd move and at this stage deem it unwise. I think easyJet should focus on what works rather than paying for more expensive runway slots and targeting business travellers. Of course, I don’t run an airline and could be proved wrong! This could turn out to be a masterful strategic move that leads to a new-look brand that performs very well.
In the period to 30 September, passenger numbers were down 50%. This closely matches the fall in the easyJet share price. The reported loss before tax was £1.27bn. Quite rightly, management have been focusing on boosting liquidity, and has raised over £3.1bn so far. Cutting the dividend also helped. In my opinion, this should continue to be the focus of the CEO, not trying to compete in a different space in the market.
Bolstering liquidity at a time like this is good. The amount raised is substantial, showing that some do have a lot of faith in the future of the company. Unfortunately, the easyJet share price is still heavily down from before the pandemic hit.
WATCH: What are the risks of investing in cryptocurrency?
Costs and sentiment weighing on easyJet shares
Another reason I’m concerned that the easyJet share price could fall further is the high cost base. For example, I can compare the average cost per passenger at different airlines. In 2019, easyJet stood at €53 per passenger, whereas Ryanair was just €31. A slightly different metric is the total airline cost per seat. By the end of Q3 2020, it stood at €86 for easyJet. When comparing this internally, it’s a large increase from the 2019 figure of €63. So when comparing the cost base to a competitor or even internally, it doesn’t fill me with confidence.
Finally, I’m becoming less optimistic about the bounce back in travel demand for 2021. If January is anything to go by, things could take longer than expected to go back to normal. The usual travel surge in short-haul flights to Europe for the ski season now looks redundant. We’ll see what the summer brings, of course, but I’m not betting on the easyJet share price rocketing higher until there’s more clarity from government.
A change in risk sentiment in the market could prove me wrong in my thinking about the easyJet share price. Faster easing of lockdowns and countries opening borders would likely see the share price regain a footing. Further, you could see some investors try and beat the rush and buy into the stock early. For me, it’s not a risk worth taking right now.
The post EasyJet share price: 4 reasons why I’m staying well away appeared first on The Motley Fool UK.
WATCH: What is bitcoin?
jonathansmith1 has no position in any of the shares mentioned. 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.
Motley Fool UK 2021