Image source: Getty Images
FTSE stocks have undoubtedly been overlooked in recent years. And it makes perfect sense. Most of the exciting innovations and share price appreciation has been happening stateside, sucking capital away from other markets.
That does mean that there are some absolute gems to be found, if we look carefully. One such gem appears to be Jet2 plc (LSE:JET2), and it’s a stock I think investors should consider very closely.
I can’t remember a more attractive valuation
Jet2’s net cash position stands out as a real strength. It’s projected to balloon from £1.7bn in 2024 to £2.8bn by 2027 — an impressive feat in the capital-intensive airline industry. This liquidity cushion not only insulates Jet2 from macroeconomic shocks but also funds strategic expansions, including a 9% seat capacity increase for summer 2025.
Valuation multiples suggest significant potential for the share price to balloon, especially when we look at the EV-to-EBITDA ratio, which takes net cash into account. Jet2’s forward EV-to-EBITDA ratio of 2.01 times for 2024 is expected to plummet to 0.53 times by 2027 — far below typical industry peers like IAG, which trades at around 4.7 times. This disconnect implies the market underestimates Jet2’s earnings power and is failing to take note of its huge cash position.
Even on a price-to-earnings (P/E) basis — which doesn’t take into account net cash or debt — the stock is very competitive. It’s currently trading at 8.1 times forward earnings, while earnings per share (EPS) are expected to grow by 9.6% annually. This leads us to a price-to-earnings-to-growth (PEG) ratio of 0.77 — a classic sign of undervaluation even when we omit the fact that half the market cap is covered by cash.
Analysts reinforce this view, with a consensus price target of £20.85 representing 37% potential appreciation from current levels. Tellingly, there are no Sell ratings among the 13 analysts covering the stock.
Reasons not to buy
I’ve been searching high and low for reasons not to buy this stock. And while I see risks, I don’t see compelling reasons to avoid it. For example, the airline sector remains hypersensitive to fuel prices (30%-40% of operating costs) and demand shocks. Recent events like UK air traffic control failures and Greek wildfires highlight operational vulnerabilities.
Moreover, its gross profit margin of 17.7% is some distance below industry-leader IAG’s 27%. I’ve also noticed that Jet2’s average fleet age of 13.9 years is a little older than average — in the Western world at least. This suggests that it may need to spend more cash on fleet updates than its peers. It does have around £5bn of aircraft on order, but these will be delivered over the next six years or so, and shouldn’t materially damage the financial position.
The next IAG?
This time last year, I highlighted IAG as the best stock in the aviation sector. It has since doubled in value. Now, I’m looking carefully at Jet2, a stock I haven’t covered before. I can’t help but think this is now the most undervalued stock in the industry. Unless I spot any glaring mistakes to my thesis, I’ll add this one to my portfolio.
