Despite posting yet another solid trading update for its third quarter, the easyJet share price (LON:EZJ) continues to lose steam. That said, there may be a buying opportunity for those wanting to buy easyJet shares on the cheap for long-term wealth creation.
Discover: My share price prediction of easyJet shares in my detailed analysis.
Despite the high expectations for its Q3 trading update, easyJet managed to beat most analysts’ expectations. Nonetheless, the easyJet share price was still weighed down by numerous factors. These include the recent air traffic controller (ATC) strikes, a recent rise in oil prices, and poor guidance from its peer, Ryanair, thereby clouding the company’s outlook going into the winter. Even so, the airline still posted a solid set of Q3 figures:
- Revenue grew by 34% to £2.36bn;
- Holidays pre-tax profits more than doubled to £49m;
- Headline pre-tax profits soared by a staggering 278% to £203m.
Overall, investors in easyJet shares will be delighted to see the firm’s passenger numbers growing towards their pre-pandemic levels. Meanwhile, its load factor also hit 90%. This was complemented by the growth in ancillary revenue, which includes add-ons such as baggage, seat selection, onboard dining, etc., thanks to an improved offering of goods and services. As such, it’s a surprise to see the easyJet share price doing so poorly.
Aside from that, ticket yields across all segments also grew by comfortable double digits. This allowed easyJet’s headline EBITDAR to grow by an exponential 261%, while margins grew by an impressive 15.8% — all of which are positives for easyJet shares.
Additionally, the business’ Holidays segment continues to climb at an unprecedented pace as it doubled its sales over the past year. Therefore, the board upgraded their guidance for Holidays to now generate over £100m in pre-tax profits for the year — up from the £80m projected last quarter. And with more growth in the pipeline from the launch of Holidays in Birmingham next summer, the easyJet share price may be set to fly higher.
Those invested in easyJet shares may also find some comfort in that travel demand doesn’t seem to be slowing down either. According to CEO Johan Lundgren, the travel operator’s winter bookings are up by more than 100%. Thus, he has plans to increase the budget airline’s capacity by 15% to meet the needs of strong winter demand. Considering the fact that winter is usually an unprofitable period for easyJet, these are encouraging signals.
Why are easyJet shares descending?
Hence, investors should wonder if fears surrounding the orange-branded airline are overdone and whether it reasonably justifies the weakness in the easyJet share price. For starters, the recent news surrounding ATC strikes shouldn’t impact easyJet’s revenue meaningfully. 95% of the passengers affected have been successfully rebooked on flights, and should alleviate any stress on the group’s compensation payments.
Worries about fuel costs also seem to be overdone. That’s because the FTSE 250 stalwart has the bulk of its fuel well hedged. With the current fuel price at c.$820/MT, investors in easyJet shares will be glad to know that management has hedged up to 77% of its fuel for the rest of FY23 at $877/MT. Moreover, they’ve also hedged FY24 and FY25’s fuel at 58% and 29% at $858/MT and $806/MT, respectively. This should provide certainty to its margins.
The easyJet share price dropped further after Ryanair’s downgraded guidance. Plus, the lagged impact of rate rises on households is yet to flow through. Nevertheless, IAG‘s outlook seems to point towards strong bookings momentum going into the winter. Furthermore, Lundgren hasn’t mentioned any capacity constraints like Ryanair CEO Michael O’Leary has. This should serve the easyJet share price well, as travel demand shows no signs of cooling.
Consequently, investors in easyJet shares should feel more confident about the conglomerate’s prospects as it continues to project robust growth going into the winter. The enterprise expects Q4 revenue per seat to grow by over 15% along with capacity, going into FY24. Cost per seat excluding fuel is also anticipated to come in flat for H2 before dropping in FY24 — this should serve as a boost to profits and the easyJet share price.
Its net cash position remains strong too, boasting one of the industry’s best balance sheets. Deutsche refers to the latest Q3 update as a ‘mixed bag’. However, we hold a more optimistic view and are reiterating our Buy rating while upgrading our price target for the stock to £6.69 from £5.97, presenting a c.48% upside from its current levels. It’s for that reason that we see the recent weakness in the easyJet share price as a buying opportunity.
Discover: The full breakdown of easyJet shares and our price target on our easyJet share tip.
Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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