easyJet’s released forecast-beating financials, so why has its share price sunk?
Another day, another fall in the easyJet (LSE:EZJ) share price. At 473.7p per share, the FTSE 100 airline’s dropped again on Tuesday (25 November), taking year-to-date losses to 15%.
Today’s 1.4% decline may be all the more baffling given it’s just released forecast-topping numbers for the last financial year. Revenues were up 9% in the 12 months to September, at £10.1bn, even as broader consumer spending across its markets remained under pressure.
So what on earth is going on?
Solid numbers
Thanks to that revenues jump, easyJet’s pre-tax profits also rose 9% over the period, to £665m.
Demand for its cut-price tickets has been helped by cost-conscious travellers switching down from more expensive airlines. But that’s not the whole story.
Indeed, its easyJet Holidays division once again stole the show in today’s update, delivering pre-tax profit of £250m. The package holiday division has hit its medium-targets early, and as a consequence divisional profit guidance has been upgraded — profits are now tipped at £450m by 2030.
This has been shrugged off by the market though, after easyJet also put out a chilly warning for the winter.
Winter woes
The airline said that losses for the winter period will be around £30m worse than previously anticipated. This reflects further investment in bases in Milan and Rome, locations that easyJet has already ploughed £20m into.
It also said that “airline profit before tax performance, particularly over winter, has been more challenging to improve at the rate we originally anticipated, due the pace of route maturity and the wider geopolitical, macro-economic and competitive environment in specific markets.”
These comments have reignited margin worries, given the highly competitive landscape and persistent economic pressures in key markets.
In better news, easyJet said it plans to grow capacity by 7% this year. Forward bookings for the current and next quarters are also higher year-on-year (up 2% and 1%, respectively).
Big dangers
Following today’s dip lower, easyJet shares now trade on a forward price-to-earnings (P/E) ratio of 6.6 times.
That doesn’t look high on paper. But in my opinion, it’s a fair reflection of the huge dangers the Luton company faces in the near-term and beyond.
On the plus side, capacity and route expansions could deliver healthy profits growth in financial 2026 and beyond. It also has a large cash pile (£602m as of September) to draw upon for sustained expansion.
Yet it also faces significant challenges, and not just because of the economic and competitive backdrop. Air Passenger Duty (APD) rises planned for tomorrow’s Budget could also take a bite from future profits.
easyJet also has to battle hard to keep a lid on costs. For this year, it’s warned of “modest inflation as cost and operational efficiencies alongside favourable fuel prices partially offset market-wide cost inflation.”
Given the airline’s wafer-thin margins, cost issues are a constant concern for easyJet and its shareholders. With it also warning of possible demand pressures, things could get a lot tougher in the months ahead.
On balance, I think easyJet’s share price could continue skidding lower. Investors should consider avoiding the cut-price airline in my opinion.
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Royston Wild 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.
