Prediction: in 1 year, the easyJet share price could be as high as…

Over the past year, the easyJet (LSE:EZJ) share price has dropped by 8%. This contrasts with some other airline stocks, like International Airline Group shares, which are up a whopping 82% over the same time period. Yet investors can have reasons for optimism when it comes to easyJet. I predict gains over the next year. Here’s why.

How we got here

Let’s first run through sopme of the reasons for the underperformance in the last year. Even though the fiscal 2024 results showed an improvement in profit from 2023, it missed analyst expectations. Part of this was due to a £40m hit from the Middle East conflict, as well as dealing with elevated oil prices and the impact this has on jet fuel.

easyJet is more heavily reliant on the UK consumer than some more international airlines. As a result, weak consumer confidence in the past year, partly due to continued high interest rates, has meant demand hasn’t been as strong as some expected.

These points remain as risks going forward, but I believe investors can find plenty of positives as well.

Reasons for optimism

The business posted an impressive 24% increase in headline profit before tax per seat versus last year. This means that the firm is becoming more efficient and bodes well for the future.

Operations are continuing to diversify, with the Holidays division posting a profit before tax of £190m, a jump of 56%! This should please investors as it helps to balance the risk of poor performance from the aviation side. It also opens up a larger potential target market, allowing future revenue to be higher than previously anticipated.

Finally, the current share price looks cheap. The price-to-earnings (P/E) ratio is 7.9, below the benchmark of 10 that I use when trying to pin a fair value on a company.

My prediction

The current P/E ratio for the FTSE 100 is 16.7. Over the next year, I think it would be reasonable for the easyJet P/E ratio to move closer to the index average. This is based on the expectation of good quarterly updates and strong earnings.

easyJet shares trade at 487p, with headline earnings per share of 61.3p. If the earnings per share figure stayed the same but the ratio increased to 16.7, it would put the share price at 1,023p!

Or let’s say that the ratio stays the same at 7.9. I expect earnings this year to increase to 71p. In this case, the share price could be 560p. I think this is a reasonable level for the stock to be at by this time next year, with the best case being 1,023p.

Of course, this is just my calculations based on valuation metrics. This is not guarenteed. But I do feel that the company is undervalued and so it’s worthy of consideration for investors at the moment.

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Jon Smith has no position in any of the shares mentioned. 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.