My latest FTSE stock investment is undervalued by 80%, according to 1 analyst

Jet2 (LSE:JET2) is a FTSE stock that recently caught my eye. And after a couple of weeks following it, I decided to invest. But it’s not just me who’s bullish. There are 12 positive analyst ratings on this stock and just one Hold rating. What’s more, the average price target is 57% higher than the current share price. And the most bullish analyst believes the stock is undervalued by 80%.

Why is it so undervalued?

I can’t say definitely why the undervaluation might be that extreme. But UK stocks have been overlooked for some time and travel stocks are cyclical, so not always a favourite among investors. However, we’ve seen IAG surge over the past year while Jet2 has lagged. It’s possible that Jet2 is overlooked as it’s AIM-listed rather than a constituent of the FTSE 100. It’s likely also a reflection of recent results. IAG has beaten consensus estimates while Jet2’s recent guidance disappointed.

I’d add to that by suggesting that as a lower-margin airline and tour operator, it’s more susceptible to cost inflation. Recent rises in employer National Insurance contributions and the minimum wage will likely impact Jet2 more than IAG. This has probably contributed negatively to investor sentiment.

Cash rich and growing

Despite the above, the long-term investment thesis is intact. Unlike many airlines, Jet2 has a lot of cash. In fact, with £2.3bn in net cash and a market cap of £2.9bn, the enterprise value of this highly profitable airline is just £600m. What’s more, the company is highly profitable. The stock is trading at 7.1 times projected earnings for 2025 or just 1.05 times EV-to-EBITDA. It’s phenomenally cheap. Here’s a comparison to demonstrate that.

	Net cash/debt	P/E	EV-to-EBITDA	Fleet age
Jet2	£2.3bn	7.1	1.05	13.9
IAG	£-6.1bn	5.2	3.17	12.5
TUI	£.1.4bn	5.8	2.11	9.2

According to the EV-to-EBITDA ratio — which is adjusted for net cash/debt — Jet2 is vastly cheaper than its peers. Yes, its fleet is a little older than IAG’s and package holiday peer TUI’s, but its EBIT margins are actually stronger than the latter.

On the matter of its fleet, Jet2 does have plans to overhaul it through to 2035. It’s planning to expand it from 135 to 163 aircraft by 2031, with a shift towards a predominantly Airbus line-up.

The scale of this investment is substantial, amounting to approximately £833m annually. Yet this level of capital expenditure is not out of the ordinary in the aviation sector, where airlines typically allocate around 12% of their revenue to such investments. Jet2’s projected net sales for 2025 stand at £7.2bn, meaning its annual capex would account for just 11.4% of revenue.

Furthermore, with revenue expected to grow to £8.6bn by 2027, this ratio is likely to decrease, easing the financial burden over time. This strategic investment aligns with industry standards and positions Jet2 for long-term efficiency and growth.

Despite my bullishness, I’m aware that Jet2 may need to start outperforming earnings expectations before awareness and sentiment pick up. Nonetheless, I’ll continue adding to my position with the stock trading at these levels.

The post My latest FTSE stock investment is undervalued by 80%, according to 1 analyst appeared first on The Motley Fool UK.

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James Fox has position in Jet2 Plc. 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.