This year has all been about Covid-related stocks and anything with even a vague association with that, but over the next year or two the biggest profits will be made from companies that have been hit by the virus but have had the strength to survive and will reap the benefits as things begin to return to some semblance of normality. We should start to see that happening once the most vulnerable people in society have been vaccinated – given that they make up over 85% of the current Covid deaths and are also responsible for a large proportion of hospital admissions. I believe that will mean that not only will international travel start to open up again, but also that people will be more willing to take the perceived risk and, having spent a lot of 2020 saving money, will also have the disposable income to go on holiday – obviously some will have suffered financially, but the furlough scheme and similar has meant that a lot of people won’t actually be that badly off. On that basis, I think that airline stocks are well worth a look, and given that Europe is much more likely to open up first - given that the vaccine is already being administered in many countries - I think that EasyJet (EZJ) is well worth a look, with a decent chance of a significant increase over the next few years.
Any fallout from Brexit is yet to be determined, but given the value of British tourism to some EU countries, such as Spain, I don’t expect to see any real barriers being put in place – and the same goes for EU passport holders wanting to go on holiday in the UK. I wouldn’t necessarily be rushing into buying EasyJet shares immediately as it has seen a bit of a bounce back recently from the 500-550p range it was trading in a couple of months back, but that was prior to vaccine news giving many stocks a boost as it defined a potential road and timeframe back towards normality. Given that a new strain of the virus has emerged, nothing all that unusual as we have already had over a thousand variations, but as this one seems to have a much higher transmission rate we may see some short term weakness over the next month or two as further lockdowns occur across Europe, including travel restrictions. But EasyJet was already expecting a weak performance in Q1, running just 20% of its normal flights, and what will really matter is the period from Easter onwards as tourist numbers start to rise, and the summer holidays in particular.
The numbers of people taking overseas holidays then will depend massively on what restrictions are in place – if PCR testing is required to travel to Europe then that will have a major impact on family holidays, given that the cost for this type of test is in excess of £100 (I recently paid £199 to guarantee results by the next day). But I think there is a good chance that by then we will see a resumption of travel corridors, or even a move to the rapid tests at airports (such as when flying to Hong Kong, which costs around £80 currently but we could see that cost falling) – however that is the big risk with stocks like this in the near term and it would have a major impact on the number of people flying if testing remained in place. I do see travel to Europe as being lower risk though than the rest of the world, on the basis of the need for testing and barriers to entry by the summer.
There isn’t much point looking at the recent financials for EasyJet as they don’t really provide much in the way of indication as to what may happen in the future, other than to note that the balance sheet is strong, having recently raised an additional £3.1 billion in liquidity, and the company has managed to successfully defer large Capex layouts – it has just done a deal with Airbus to move delivery of new aircraft a few years further down the line, as having sold some of its fleet whilst at the same time implementing lease-back deals. So, I’m happy that it is doing everything possible to keep its costs down and preserve cash until such time as air travel numbers start to improve significantly. Currently its market cap is circa £3.8 billion, at a share price of 838p, and well below the 1,500p level it was at just before Covid hit. Obviously this year has made a big dent in its progress and we can’t just expect that it will return to those previous share price levels (especially given the 59.54 million shares issued in a placing at 703p back in June), but I would view this as a blip rather than being terminal, and in the future I see a return to it being profitable and also paying a decent dividend yield. As you’d expect, dividends were suspended back in October, when the company also issued a profit warning, and currently no guidance has been issued on its expected financial performance for 2021. If you buy now you have to accept that there may well be further dips over the next few months - in fact I would be surprised if there aren’t - and staggering your buys here could be a good strategy, buying on any dips that we do get. Despite all the potential negatives and chance of turmoil still to come, I would view this company as a good investment with a view to holding for the next few years.
Filed under: EasyJet, ShareProphets share tips of the year, Finablr, New Year’s Eve Red Flags, Bearcast
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