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Shares I love: easyJet

Margaret Lawson of SVM UK Growth explains why she invests in the budget airline
November 25, 2015

Margaret Lawson, co-manager of SVM UK Growth Fund (GB0032084708), believes the market doesn't fully recognise the long-term strength of budget airline easyJet (EZJ).

The company is one of Europe's leading low-cost airlines, operating on more than 600 routes across more than 30 countries with a fleet of over 200 Airbus aircraft. It employs more than 8,000 people and flew more than 60m passengers last year.

"EasyJet's summer trading update highlighted the resilience of the company's offering and offered a solid rebuttal to those who claimed the company would struggle to compete with an aggressively expanding Ryanair (RYA)," she says. "Despite increasing its capacity markedly, easyJet still managed to deliver better-than-expected revenues per seat.

"The dismal August UK weather will also have provided a welcome boost, as rain-soaked UK customers booked last-minute flights to warmer and drier climates. While the company has pulled back on some routes and bases, notably Rome Fiumicino, this makes sense when easyJet can successfully redeploy its aircraft into more profitable areas.

"The arrival of new chief financial officer Andrew Findlay, meanwhile, who was formerly at Halfords (HFD), means the company has a fresh pair of eyes looking at the cost base of the group. While recent results show that easyJet has costs under decent control, the cost per seat gap with Ryanair suggests there are still some benefits to be realised. While easyJet's greater exposure to prime airports means it is unlikely to ever fully close this gap, we would expect Mr Findlay to be looking for areas that can be optimised further.

"With the company trading on a price/earnings ratio (PE) of 11.92, we believe the market is still not fully recognising the long-term strength of easyJet."

The last IC recommendation on easyJet shares was 'Buy' at 1,743p on 18 Nov 2015. We said "the company's track record in taking market share is superb", and its PE ratio is lower than Ryanair's. As at 25 November, the shares were trading at 1,605p.