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Buckle up

23 January 2014 By Olaf Storbeck

EasyJet’s shares are flying into ever thinner air. Over the last two years, the market value of Europe’s second-largest low-cost carrier has quadrupled on the back of a strong operational and financial performance. Decent first-quarter results indicate that the airline has not yet reached the limits of its business model. But the steep rise of its share price will end soon. The company’s fundamentals have yet to catch up to its sky-high valuation.

EasyJet’s first-quarter results may prove a turning point. They were a tad better than analysts expected. The stock nonetheless fell 2.8 percent. Barring further positive surprises, even the current valuation is hard to justify.

The airline’s organic growth is still healthy. It attracted 4.2 percent more passengers in its fuller planes. Costs seem to be under control. The fact that the airline expects first-half pretax losses to rise to 70-90 million pounds, from 61 million pounds a year earlier, is rather irrelevant. The comparison is distorted by an accounting technicality: Easter, a peak period, will fall in April rather than March and will be booked in the second half of the group’s financial year. This dents pretax profit in the first half by about 20 million pounds. EasyJet nonetheless expects revenue per seat to rise slightly over the first six months, which is remarkable in itself.

But shareholders have gotten ahead of themselves. EasyJet has become one of Europe’s most expensive airline stocks. Its forward price-earnings ratio of 15 puts it on a 25 percent premium relative to its peers, Starmine data shows. The company’s P/E ratio, which hinges on an expected 9.5 percent increase in net profit, is at par with Ryanair, but its Irish rival earns a higher profit margin and offers a more attractive dividend yield.

Ryanair is trying to emulate some of easyJet’s successful initiatives. That includes allocated seating, a less abrasive customer service and an effort to woo business passengers. For their part, legacy carriers aren’t standing idle. Lufthansa successfully restarted its no-frills brand Germanwings, while International Airlines Group, the parent company of British Airways and Iberia, acquired fast-growing Spanish low-cost carrier Vueling.

EasyJet is well positioned to cope with this increased competition. Its shareholders nonetheless should revise their high-flying expectations.


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