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The easyJet share price is up 50% this month! Should I buy?

Paul Summers
·3-min read
An airplane on a runway
An airplane on a runway

Last month, I suggested holders of easyJet (LSE: EZJ) could be in for a nightmare November, with the company likely to report the first loss in its history. It turns out I was spectacularly wrong.

Since the beginning of the month, the easyJet share price has rocketed. By yesterday’s close, it was up a little over 50%. Who needs penny stocks?

In my defence, this magnificent gain isn’t the result of any actions on the battered airline’s part. Instead, easyJet’s ascent is simply a consequence of ongoing good news on vaccines for the coronavirus. A rising tide lifts all boats. And airlines, it would seem.

But let’s ignore the catalyst. Today, I’m asking one question: should I buy now?

Massive loss

The numbers for the last financial year were always destined to be pretty awful, even though the coronavirus pandemic was absent for the first half of it. And so they are.

Total revenue fell just under 53% to £3bn over the 12 months to the end of September as flight were grounded and airports shut. Passenger numbers halved to 48.1m compared to 96.1m in 2019 and capacity tumbled by 47.5%.

As you might expect, all this had a horrible impact on easyJet’s bottom line. Despite cutting costs, the company reported a headline pre-tax loss of £835m this morning. On a positive note, this was at least within its guidance range of £815m-£845m.

For investors, however, this is all in the past. It’s all about the recovery now. On this front, easyJet’s management appears optimistic.

Ready for take-off?

According to CEO Johan Lundgren, the airline has not only withstood the impact of the pandemic” but also has “an unparalleled foundation upon which to emerge strongly from the crisis.”

That said, the company is rightly remaining cautious about its near-term outlook. Today, easyJet said it expects to fly “no more than” 20% of planned capacity in the first quarter of its new financial year.

The former FTSE 100 constituent added it wouldn’t be providing any financial guidance for FY21. Instead, it’s concentrating on “cash generative flying” over the winter with the view to significantly increasing capacity when demand for air travel bounces back. This seems reasonable considering the 900% increase in sales after quarantine restrictions for the Canary Islands were lifted in October.

Following a capital raise, the business also has liquidity of £3.1bn. Even so, £1.1bn in net debt suggests a resumption of easyJet’s dividend policy looks a long way off.

Profit-taking ahead

Despite the solid gains made in November, I’m still cautious on easyJet. Having evolved into a quality-focused Foolish investor over the years, I’m far more interested in owning slices of businesses rather than taking opportunistic ‘punts’ on share prices based on events beyond their control.

Moreover, one must also consider the possibility that at least some market contrarians will wish to bank profits. Indeed, that’s exactly what appears to be happening today. As I type, easyJet’s share price is down by 4%. As positive as recent news on vaccines are, the logistical challenges that lie ahead could see a continuation of this selling pressure for some time to come.

Congratulations to those brave enough to buy when the easyJet share price bottomed in October. I’m still not tempted to join the queue.

The post The easyJet share price is up 50% this month! Should I buy? appeared first on The Motley Fool UK.

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Paul Summers 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 2020