Are easyJet Shares Still a Viable Investment Following the Iranian Missile Attacks?
Low-cost Airline Amid Global Unrest
Shares for easyJet (LON:EZJ) have seen a rollercoaster ride recently, thanks to the turbulence in the Middle East. Wondering if this stock is still a solid pick? Let's take a look.
A Tangled Tango
It's not hard to view easyJet as a waltz with a financial crude oil supply, given its April trade pattern. Fuel accounts for a whopping 29.9% of easyJet's headline airline EBITDA costs, and a spike in oil prices could send their cost base skyrocketing. This could squeeze earnings, and, frankly, it seems the market is spooked by that possibility.
Nevertheless, experts at JP Morgan predicting oil climbing to $130/bbl, thus far, haven't come to pass, and I don't see it happening anytime soon. Here's why:
- Economic chaos would ensue, and a recent ceasefire between Israel and Iran has helped cool the conflict.
- The Iranian parliament's vote to close the Strait of Hormuz, through which about 20.0% of the world's oil flows, has yet to receive national security council approval. 90.0% of Iran's oil exports pass through the strait, making up 76.5% of government revenue. Closing the strait would be economic self-destruction for Iran, and doing so would undermine the regime's stability.
- Iran's failed attempt to close the strait in the 80s provides a telling precedent. In that instance, the US Navy stepped in to protect shipping lanes and maintain the flow of oil exports, mainly to allies like China.
The Oil Hedge
Even in the event of oil prices rising, easyJet's oil contracts offer a safety net. Currently, they're hedged at 83.0% for H2 at $750/MT (with the current spot rate hovering around $714). They've already hedged about 45.0% of FY26 fuel at an average rate of $709/MT.
Travel Demand Stays Strong
laughter-emoji Despite geopolitical fuss, travel demand hasn't waned. easyJet forecasts despite missile flare-ups between Israel and Iran, releasing optimistic interim results. They expect H2 sales to outpace last year, with a drop in fuel costs by approximately 8.0% for FY25.
This optimism follows a strong H1, featuring group revenue up 8.1% to £3.53 billion, primarily thanks to a 5.4% passenger revenue increase to £2.16 billion. In fact, easyJet's load factor improved 1.2% to 87.9%, as passenger numbers rose 7.6% to 39,371k, surpassing seat growth of 6.1% to 44,915k.
Annex Revenue Soaring
Ancillary revenue grew robustly by 7.4% to £978 million, but it's the company's packaged holidays segment that took the spotlight, recording a 28.6% revenue hike to £400 million. easyJet's Holidays business now represents 9.0% of the market share, and the customer base swelled 27.3% to 1,067k, boosted by a 1.0% rise in ASP to £578.
Despite an H1 EBITDA loss of -£5 million, it's worth noting that unfavorable Easter timing and promotional pricing for new winter leisure routes skewed the figure. When accounting for Easter's unfavorable timing, H1's PBT would've been nearly £50 million higher at -£344 million, inching closer to last year's -£350 million figure.
A Bright Future Awaits
Stepping back from geopolitics, I believe easyJet is positioned for success. The group's medium-term objectives remain feasible, including achieving £1.00 billion in PBT, £250 million of which will come from Holidays, and more fuel-efficient planes introducing over £3 in unit cost savings.
Additionally, new route launches in London Southend, Milan Linate, and Rome Fiumicino promise higher profits via excellent ancillary opportunities and increased load factors. Furthermore, with Holidays' attachment rate sitting at merely 6.4%, easyJet has ample room to expand.
The competition is cooling on certain routes, as Wizz Air has withdrawn 14 direct routes with easyJet this summer, potentially allowing easyJet to snag more market share during the upcoming holiday rush.
A Hidden Bargain?
Clearly, easyJet shares have struggled to break the 600p barrier since 2022. However, considering the company's earnings growth, the stock seems undervalued. I project easyJet's EBIT margin to grow by 100bps to 7.41% by FY28.
The shares' EV/EBITDA (2.7) suggests easyJet is highly undervalued, especially in comparison to its sector average (7.7). Given a relatively cautious PEG of 0.6 compared to the sector's 1.5, the case for a solid return on investment becomes even stronger, with earnings expected to grow at a CAGR of 16.4% through FY28.
easyJet's financial performance in the business sector is closely tied to oil prices, given the significant portion of its costs allocated to fuel. Despite the volatility in global finance, easyJet's shares are hedged against rising oil prices, offering a safety net, especially in the second half of the fiscal year. The FTSE-listed airline is optimistic about travel demand continuing to remain strong, with easyJet's Holidays segment contributing significantly to its revenue growth and market share.
