Describing a departing chief executive as a lame duck is somewhat unfair. After all, they are still likely to have a significant impact on the firm’s financial performance between the time they announce their resignation and the date of their departure.
In reality though, investors know that the incoming chief executive will almost inevitably make changes to the company’s strategy. Therefore, they typically adopt a “wait and see” approach so they can deduce how a new incumbent intends to deliver future profit growth. This can mean that a firm in the process of implementing senior management changes fails to deliver significant index-beating performance in the short run.
With easyJet’s current chief financial officer set to become its chief executive early next year, Questor would not be surprised if its share price performance is somewhat uninspiring in the near term. This is despite the company facing an improved operating outlook that should catalyse its financial performance.
Indeed, the firm’s latest quarterly trading update showed it was making encouraging overall progress. Revenue increased by 11pc and profits rose by 16pc in the third quarter as passenger demand continued to grow. Passenger numbers were up 8pc versus the same period of the prior year, with the company’s load factor rising by 0.4 percentage points to 90pc and capacity up 7pc year-on-year. Demand for the company’s services should continue to rise.
Investors may become increasingly concerned about a cost-of-living crisis, since inflation is due to creep up to just under 3pc by the end of the year but pressure on discretionary incomes has all but dissipated. When combined with the positive impact on consumer spending from an expected sustained fall in interest rates, which are due to decline by around 120 basis points over the next two years, the outlook for the airline industry is becoming increasingly upbeat.
According to the International Air Transport Association, passenger numbers in Europe will rise at an annualised rate in excess of 5pc during 2025 and 2026. easyJet is becoming increasingly well placed to capitalise on an improving market outlook, with the firm expecting to grow its capacity to 100 million seats in the current financial year. If met, this would represent an 8pc year-on-year rise.
The company’s strategy of expanding its package holidays division is also set to boost its financial performance. easyJet holidays is expected to generate pre-tax profits in excess of £180m in the current financial year, which would equate to a 48pc increase on last year’s figure.
The segment’s strong growth rate is expected to contribute to a 23pc annualised increase in the firm’s earnings per share in the two financial years to 2025. This puts the company’s shares on a forward price-to-earnings ratio, using financial year 2025’s profit forecast, of just 7.6. This suggests that the stock offers a wide margin of safety, with investors apparently not yet having priced in a vastly improved financial performance over the coming years.
Growth in the easyJet holidays segment also reduces overall risk, since package holidays are relatively resilient due to their perceived value-for-money offering. The company’s risk/reward opportunity has also improved as its financial position has strengthened. For example, its net cash position rose from £146m in March to £456m in June. This shows that the firm is capable of not only overcoming future periods of economic instability, but can also reinvest for long-term growth.
Of course, easyJet’s share price performance has proved to be a huge disappointment since Questor first tipped the company in July 2017. It has produced a 64pc capital loss since then and has underperformed the FTSE 100 index by 75 percentage points.
While we do not expect a dramatic turnaround in the firm’s share price performance in the short run, this column nevertheless remains upbeat about the company’s long-term recovery potential.
It is becoming increasingly well placed to take advantage of an improving operating environment, while its rapid expansion into adjacent product areas provides scope for additional growth. With a solid financial position that has significantly improved over recent months and a wide margin of safety included in its market valuation, the stock remains a worthwhile purchase despite its downbeat past investment performance.
Questor says: buy
Ticker: EZJ
Share price at close: 517.4p
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