Over the past five years, buying shares in easyJet (LSE: EZJ) has become a lot cheaper. In fact, during that period, the share price has shrunk by slightly more than half.
Like some investors, I look at the increase of around 60% since the start of last year and wonder whether the shares can sustain such a level.
But I have also been considering what it would take for them to keep moving up and potentially get back to where they were five years ago. Doing that would see the easyJet share price double from where it stands now.
Then and now
Looking at share prices alone is not always a great guide to whether a company is worth more or less than it used to be.
That is because a company’s market capitalisation is a function of the number of shares in circulation as well as their price.
During the pandemic, easyJet massively diluted existing shareholders issuing new shares to raise funds. In practice that means that, even if earnings now were the same as then, earnings per share would be markedly less. That in turn would justify a lower share valuation in many investors’ eyes.
Here and now
So, looking only at the current price of easyJet, what do we see?
They trade on a price-to-earnings ratio of 11. That does not seem expensive to me if earnings can be maintained at their current level, or grow.
But a key risk of investing in airlines is that earnings can often move around dramatically due to factors largely or wholly outside airlines’ control, from surging fuel prices to natural catastrophes reducing customer demand.
In fact, that risk is alone is enough to put me off adding easyJet shares to my portfolio.
Are the shares cheap?
Just because I am not comfortable with the risks does not mean that I do not see value in the shares.
I think the easyJet share price does look cheap at the moment. In a trading update this week, the airline reported 22% year-on-year revenue growth for the latest quarter and strong demand in coming months.
Net debt more than halved from the same period last year, sitting at £0.5bn. The easyJet balance sheet looks far healthier now than it did during the pandemic.
The company is paying dividends once more after axing them for several years. With its strong brand, proven business model and improving financial performance, I think the shares look cheap at the moment.
Still, investing in airlines can be an expensive and risky business. I remain unhappy with the risks of sudden demand shocks that are outside airlines’ control. I have no plans to invest.
The post easyJet shares cost half of what they used to. Are they a bargain? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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More reading
Why the easyJet share price is rising despite a first-quarter loss of £126m
Up 33% in 3 months! Can this leading FTSE 250 stock keep climbing?
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When will easyjet’s share price fly back to £14.90?
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C Ruane 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.
