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I was right before about easyJet shares. What would I do now?

Stuart Blair
·3-min read
An airplane on a runway
An airplane on a runway

Back in May, with the easyJet (LSE: EZY) share price at around 500p, I wrote an article about how the shares were too cheap to ignore. A few weeks later, with them priced at nearly 900p, I then stated that it was time to sell. Since then, easyJet shares have faced a torrid time, falling over 40% to around 510p. But after its fourth-quarter trading update, is it now time to buy the stock or has it got further to fall?

Fourth-quarter trading update

Unsurprisingly, the Q4 update was pretty grim. In fact, the airline made a loss before tax of around £300m, in comparison to a profit before tax last year of £528m. Revenues were also 73% lower and the number of passengers who flew with the company fell by 67%. This means that the company is in line for a full-year loss for the first time in its history.

Even so, nobody can say such a grim trading update was unexpected and the easyJet share price has remained fairly steady since. I also believe that easyJet has managed to weather the storm better than some of its rivals, such as IAG. For example, the company has managed to raise over £2.4bn since the outbreak of Covid-19. This has been from a mixture of debt and equity and it should allow the firm to survive the crisis.

There are also negatives with raising such a large amount of money. For example, net debt now stands at £1.1bn, as opposed to £326m last year. Consequently, the broker Morgan Stanley estimates that the company has less than 10 months of sufficient liquidity. This may force it into issuing more shares or selling more assets, which could both have a negative impact on the easyJet share price.

What’s next?

Unfortunately, the immediate future doesn’t look much brighter. For example, in Q1 of 2021, easyJet expects to fly at 25% of planned capacity. This is due to a number of travel restrictions in the markets that the company operates in. On an industry-wide basis, a full recovery is not expected until at least 2023, pointing to significant pain ahead.

On the other hand, easyJet shares could be boosted by the news that early booking levels for summer 2021 are in line with previous years. As a result, a recovery looks possible for the budget airline, provided that it can survive the next few months.

Would I buy easyJet shares?

Overall, the shares do look extremely cheap. The company has performed well in previous years, and I think it will be able to survive the crisis. But survival doesn’t necessarily mean that the company will be able to thrive. This will be especially difficult in the current environment, and the upcoming winter months look especially hard.

As a result, while easyJet shares are a very tempting buy, I’m leaving them on the shelf for now. The short-term future looks especially bleak, and I reckon this could lead to more short-term pain. Such a large amount of risk associated with the shares means that I’d therefore look elsewhere.

The post I was right before about easyJet shares. What would I do now? appeared first on The Motley Fool UK.

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Stuart Blair 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