In the early weeks of the pandemic, most market participants avoided travel and leisure stocks, especially airlines. But as investor sentiment about the economy began to improve, so did the share prices of these companies.
For example, year-to-date, the and indices are up more than 17.4% and 29.3% respectively. Since the beginning of the year, shares of American Airlines (NASDAQ :), Delta Air Lines (NYSE 🙂 and United Airlines (NASDAQ 🙂 have returned more than 39%, 16% and 29% respectively.
In the UK, airlines were also among the most traded stocks on the and. Today we are investigating the FTSE 250 member EasyJet (LON 🙂 (OTC :). Over the past 12 months, the EZJ stock is up 35% while the YTD return is around 11%. On April 15, the stock closed at 990p ($ 13.80 for the US stock). Its market cap remains £ 4.5 billion (or $ 6.2 billion).
A low-cost European airline
Luton-based EasyJet operates domestic and international scheduled services on more than 1,000 routes in more than 30 countries through its member airlines EasyJet UK, EasyJet Switzerland and EasyJet Europe.
In the UK, nearly 50% of the population has had their first dose of the COVID-19 vaccine, and the number of new infections has fallen significantly. Thus, the UK is gradually opening up its economy.
Still, for budget airlines such as EasyJet, questions remain about international travel, especially in Europe. Some important countries such as Germany and France have vaccinated about 20% of the population. Therefore, it may take some time for travel restrictions to be lifted, hampering EasyJet's efforts to regain revenue.
Another concern for EasyJet and other low-budget airlines is the proposed requirement to monitor travelers' vaccination status. Larger airlines such as International Consolidated Airlines Group (LON 🙂 (OTC :), owner of British Airways, may find it easier to implement personnel and systems to regulate this.
On the other hand, EasyJet can experience a dent in demand due to expensive COVID-19 testing requirements. Travel may only be appealing to wealthier passengers, as test kits cost over £ 100 (or $ 138), more than the price of a cheap plane ticket. The recent relaxation of UK restrictions could lead to " budget" vacations being taken domestically rather than overseas this summer.
Given the significant price increase over the past year, potential investors should ask, How much upside potential does the stock have under the current circumstances?
The UK government will announce its international travel plans in early May, a date to keep in mind for EasyJet and other airline stocks. Positive news could act as a catalyst for a price increase of more than 1,000 pence. On the other hand, more bleak news for the industry could mean profit-taking.
Bottom Line
The travel industry is working hard to adapt to the new facts of life, while travel remains at a low level, especially internationally. Nevertheless, airline stocks have benefited from improved investor sentiment in recent months.
Given the uncertainty about European travel during the summer months, we would not buy shares of EasyJet or other airlines at this current level. In recent days, Liberum lowered EZJ shares from "buy" to "hold". For EZJ shares, a drop to 950p or less would improve the margin of safety for investors buying and holding.
Finally, investors who are interested in EZJ stock but don't want to allocate capital to one company may want to consider purchasing an exchange-traded fund (ETF) that owns the stock. Examples include:
Invesco FTSE RAFI Developed Markets ex-US ETF (NYSE :): 11.7% higher on YTD;
US Global Jets ETF (NYSE 🙂 : up 18.7% YTD.
