One of the most eye-catching performances in the FTSE 100 over the past month is undoubtedly easyJet (LSE:EZJ). The easyJet share price is up 49% over this period, meaning it’s now only down 6% in the past year.
So what’s the story here and can the rally continue?
Proving resilience
There are two main factors that have helped the stock. The first one was the half-year results that came out in late May. On the face of it, some might have been unimpressed given the headline loss before tax of £552m was an increase from the £394m loss in the prior year. However, there were lots of positives to take from it.
For example, it recorded “a 6% rise in passenger numbers to 42 million and a 2% improvement in load factor to 90%”. More than that, liquidity was strong, with £434m in net cash. The CEO actually said that easyJet has “one of the strongest investment‑grade balance sheets in European aviation“.
This certainly helped to reassure investors at a time when the conflict in the Middle East was causing problems for fuel prices and customer demand.
Yet this flips to our second factor, as in recent weeks there have been signs of a peace deal with the US and Iran, which now looks like it has materialised. The optimism around this has been another factor boosting the company’s stock price.
The direction of travel from here
Clearly, some concerns about higher fuel costs, inflation, and weak consumer spending remain. So if these fears continue to ease, I think the stock has further room to rally.
It’s not like the company is overvalued. In fact, far from it. It has a price-to-earnings ratio of just 7.61. This is over half the FTSE 100 average ratio. When expectations are low, even modest improvements can spark a powerful rebound.
The stock could benefit from other factors, such as from its package holiday arm, easyJet Holidays. This has become an increasingly important growth driver, helping diversify earnings beyond simply selling seats. If demand stays healthy and the airline maintains pricing power, profits could keep surprising.
However, risks remain. We’re certainly not out of the woods yet with the situation in the Middle East. Any slowdown in consumer spending could hit bookings quickly. There is also the risk that the recent rally has simply moved too far, too fast.
Yet on balance, I don’t think this is the end of the runway for the easyJet rally. The stock’s still cheap and isn’t even at the highest level in the past year. With momentum likely coming from lower energy prices as the situation in Iran finally gets sorted out, I think it could keep going.
I bought the stock at the start of the month and feel it’s one investors could consider.
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Jon Smith owns shares in easyJet.
