Are easyJet shares destined for a return to the FTSE 100?

FTSE 100 easyJet Shares Soar Soon

A big fall in the easyJet share price (LON:EZJ) during the pandemic saw the low-cost airline demoted from the FTSE 100 (INDEXFTSE:UKX). However, if the stock achieves our price target, it could return to the UK’s premier index sooner rather than later.

Discover: The share price prediction of easyJet shares in our detailed analysis.

With a market cap of £3.26bn, easyJet shares (LON:EZJ) are in the top ten FTSE 250 stocks measured by total value. Accordingly, although the easyJet share price is still anchored well below its pre-pandemic levels, a return to the FTSE 100 (INDEXFTSE:UKX) index isn’t out of the question for Europe’s second-largest low-cost carrier. Indeed, strong Q3 results show good momentum for the high-flyer.

  • Passengers flown grew 7% to 23.5m from 22.0m;
  • Revenue per seat increased 23% to £81.08 from £65.67;
  • Pre-tax profit returned to £203m from -£114m.

Investors of easyJet shares will welcome the record quarter and return to profitability as important steps on its route back to the FTSE 100 — and the airline expects to deliver “another record pre-tax profit performance for Q4. It’s scheduled to operate over 160,000 flights in Q4 with capacity to fly around 29m seats. However, the company has cautioned that unprecedented disruption could affect its ambitions.

Currently, easyJet shares trade on a forward price-to-earnings (P/E) ratio of c.8.2. This is below the industry’s long-term average and also below the FTSE 250 and FTSE 100 averages. Strong earnings momentum coupled with a relatively cheap valuation is an attractive combination for investors. As such, there’s a credible case to be made that the easyJet share price is in bargain territory today.

Furthermore, the firm repaid $950m in debt in Q3, which means no aircraft is currently encumbered. The group also signed a new $1.75bn five-year undrawn debt facility, thereby maintaining liquidity and reducing its financing costs. Prudent liability management means the business has a more sustainable debt profile than industry competitors, such as its FTSE 100 competitor IAG and FTSE 250 peer Wizz Air.

Nonetheless, one factor that complicates the outlook for easyJet shares is the rising cost of jet fuel. After falling back from last year’s surge, spot fuel prices have risen by c.40% in the last three months alone. Nevertheless, the former FTSE 100 stalwart has hedged 77% of its fuel for Q4 and 58% for H1 2024. This should help to shield easyJet from the impact of elevated costs, although it’s still worth keeping an eye on jet fuel prices going forward.

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Do easyJet shares have a clear flight path to the FTSE 100?

easyJet’s route back to the FTSE 100 wasn’t going to be easy following the pandemic’s severe impact on the travel industry, and this summer had plenty of its own disruption too. Repatriation flights due to Mediterranean wildfires, air traffic control strikes, and recent unprecedented failure in the UK’s air traffic system all point to higher extra costs for the operator, which could pose an unwelcome setback to its profit growth.

Additionally, the cost-of-living crisis has created difficult trading conditions for many FTSE 250 and FTSE 100 shares, with easyJet included. Rising mortgage rates and high inflation are squeezing consumers’ budgets, which could impact holiday spending. Yet, easyJet is confident its pricing remains competitive, stating the budget airline continues to offer great value for customers” with over 50% of fares on sale for under £50.

Conversely, pent-up travel demand is a key tailwind that suggests spending could hold up well despite inflationary pressures, aiding easyJet’s path back to the FTSE 100. Last week, the number of seats flown in Western Europe was only 0.7% lower than the same week in 2019. Encouragingly, the trend across 2023 as a whole has only slightly trailed the pre-pandemic period.

Beyond easyJet’s core airline business, the former FTSE 100 stock’s holidays division is also performing well after only starting meaningfully last year. The board believes this unit is on track to deliver its medium-term pre-tax profit target in excess of £100m, as Q3 revenue accelerated 104% sequentially to reach £237m. Therefore, the holidays division is now a useful string in easyJet’s bow.

Overall, the easyJet share price has shown admirable strength this year, climbing 31% as mounting evidence suggests a robust demand recovery is underway. Although challenges remain, easyJet shares could return to the FTSE 100 index provided the corporation maintains its positive momentum. And despite recent disruptions, we believe the stock still justifies a strong Buy rating with a price target of £6.65, implying a c.54% upside.

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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