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easyJet (LSE: EZJ) shares took a hit last week. This was despite the fact that the airline announced it’s set to deliver a record Q4 pre-tax profit.
Should I swoop in and buy some shares on the back of the company’s rising profits? Let’s discuss.
Record profits
A trading update from the company on Thursday (12 October) showed that business performance has been decent of late.
For the quarter ended 30 September, passenger growth was up 8% year on year with revenue per seat (RPS) up 9% (guidance here was 10%).
Thanks to this solid passenger and RPS growth, the company expects to deliver a record Q4 headline pre-tax profit of £650m-£670m.
Looking ahead, easyJet said it was setting new ambitious medium-term targets, and that it plans to resume its dividend (although this will be relatively small).
It also said it’s planning to purchase over 150 new planes for delivery between FY2029 and FY2034.
Murky outlook
While easyJet’s recent performance has no doubt been solid, I have a few concerns looking ahead. To my mind, the outlook for airlines has deteriorated significantly in recent months.
For starters, it’s become clear interest rates are going to be higher for longer. This is going to have implications for consumer spending. Are consumers going to continue spending on flights? It’s hard to know.
Secondly, oil prices have surged. This is significantly increasing fuel costs for the airlines. easyJet noted last week that its fuel cost per seat in sterling was up a huge 24% year on year.
Third, we have the terrible events in Israel. There is a chance these could dampen enthusiasm for travel across Europe.
What worries me here is that the last few years have been an absolute bonanza for airlines as consumers have been desperate to travel (and willing to pay very high ticket prices).
Yet easyJet shares have still struggled. Since the beginning of 2022, they’re down 30%.
If they couldn’t deliver big gains in that kind of environment, when will they?
Low valuation
Now it’s worth noting that the shares do have a relatively low valuation at present. For the current financial year (ending 30 September 2024), analysts expect easyJet to generate earnings per share of 56.9p.
That puts the stock on a forward-looking price-to-earnings (P/E) ratio of around seven – well below the market average.
But I think the low valuation is commensurate with the risks here.
Generally speaking, airlines are very risky stocks (because there’s so much that can go wrong) and they tend to be poor long-term investments. Professional money managers know this and typically steer clear of them.
Given the murky outlook here, I won’t be rushing to buy easyJet shares for my portfolio.
All things considered, I think there are much better stocks to buy today.
