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easyJet’s (LSE: EZJ) share price has dropped 11% from its 12 December one-year traded high of £5.90.
This could reflect that the budget airline’s business is simply worth less fundamentally than it was before. Or it might signal a bargain-buying opportunity.
I ran the key numbers and looked more closely into the business to find out which it is.
How does the stock valuation look?
My starting point in assessing any share’s value is to compare its key ratios with those of its competitors.
On the price-to-earnings ratio, easyJet currently trades at 9.5. This is top of its group of competitors, which average 7.1, so it is overvalued on this basis.
These firms comprise Wizz Air at 5.5, International Consolidated Airlines Group at 6.9, Singapore Airlines at 7.8, and Jet2 at 7.9.
However, it is undervalued on the price-to-book ratio at 1.6 against its peers’ average of 2.2. And it is also undervalued at a price-to-sales ratio of 0.4 compared to the 0.6 average of its competitors.
To cut to the chase on this valuation, I ran a discounted cash flow (DCF) analysis. This identifies where the price at which any firm’s stock price should trade, based on forecast cash flows for the underlying business. The DCF for easyJet shows its shares are 62% undervalued at their present price of £5.26.
Given this, their fair value is £13.84.
What about its earnings growth prospects?
Growth in earnings is ultimately the key driver for any firm’s share price (and dividends). A risk to easyJet’s is the high level of competition in its sector that may compress its margins.
In 2024 the firm saw a 34% year-on-year rise in profit before tax to £610m. Revenue over the period rose by 14% to £9.309bn. Revenue is the total income made by a firm, while earnings are what remains after expenses are deducted.
Drilling further down into the headline numbers, revenue per available seat kilometre (RASK) edged up 2% — to £6.65. RASK indicates how much revenue an airline makes for each seat it offers, per kilometre flown.
However, its H1 2025 results showed a £394m loss before tax. Partly this resulted from investments to increase long-term passenger capacity causing a short-term reduction in revenue per seat. It also partly reflected the rise injet fuel over the period.
That said, analysts forecast that easyJet’s earnings will increase every year by 12.2% to the end of 2027. Its annual revenue over that period is set to rise by 6.7%.
Will I buy the stock?
I am over 50 now, which means that I am in the later part of my investment cycle. In practical terms, this means I am best advised to take fewer risks in my stocks.
This is because the less time remaining in one’s investment cycle, the less time shares have to recover from any shocks.
The airlines sector is subject to many broad risks. One is a further surge in the cost of living, which may deter people from taking holidays. Others include further war-related closures of major transport routes that can hit earnings.
That said, I think easyJet is well worth considering for the long term for people at an earlier stage in their investment cycles.
