This airline has been a frustrating investment – but it could be about to pay off

Questor share tip: easyJet faces short-term challenges but there are reasons for optimism

Dan Coatsworth 26 July 2023 • 6:00am

There is nothing worse than being on a plane and the captain says the aircraft will remain on the tarmac because of unexpected delays.

You have checked in your bags, found your seat and are eager to start your holiday. Sitting idle on the runway was not on the agenda.

Anyone with shares in easyJet might be feeling the same frustration.

The investment case is enticing – analysts expect profits to grow, more people are booking to fly with the airline, and the holidays business is proving to be a major success. So why have the shares gone nowhere since February?

That is not the experience investors signed up for. There is a reasonable explanation. First, the strong rebound in travel demand post-pandemic is old news. Stock markets are forward-looking and investors already know the airline industry has shaken off the shackles of Covid.

Second, the outlook has become more uncertain thanks to a new wave of strikes including air traffic control workers in Europe that could cause cancellations and disruptions. Fires in Rhodes and Corfu have not helped, either. Repatriation flights to pick up stranded customers add to costs and the idea of a last-minute holiday to Greece is suddenly less appealing.

There are reasons why investors might still find the stock interesting. Earnings forecasts for the year to 30 September 2024 have increased by 45pc since March, yet its share price has been flat over the same period. That looks like an anomaly. Upgrades to earnings expectations should, in theory, be a major share price catalyst.

The market might also be underestimating the importance of easyJet’s package holidays arm. This part of its business, which only launched in November 2019, will generate more than £100 million pre-tax profit this year, according to the company. That is a remarkable achievement in such a brief time.

The big unknown in the short-term is how the tragic scenes in Greece will impact earnings. In two months, the crisis could be in the rear-view mirror so investing now, or retaining shares if you already own them, requires taking a view on whether this is a short-term hurdle or a new recurring risk thanks to climate change.

Questor says: Hold

Ticker: EZJ

Share price at close: 446p

Update: Admiral

It has not been the easiest time to run a motor insurance company. Just ask Admiral’s chief executive Milena Mondini, who has presided over the company’s worst share price performance since 2011.

From peaking at £36.76 in August 2021 to now trading at £22.54, shares in Admiral have been through a prolonged downturn. Questor now has its eye on the rebound potential.

The car insurance sector has experienced higher costs of fixing cars, delays in getting parts which has meant customers using courtesy cars for longer, and a rise in the volume of claims. That led to a decline in underwriting margins in parts of the industry. Shares in Admiral tried to bounce back between March and May, then fell back in June, only to start moving back up again in July.

The recent share price volatility has coincided with news coverage about how car insurers have jacked up premium prices, with people paying as much as 50% to 70% more when their policy comes up for renewal. While that implies more income for insurers, there might also be a greater than normal level of churn between insurance providers as drivers shop around for the best deals.

In March, Admiral said it had taken a ‘disciplined approach’ to preserve underwriting margins, increasing prices across its business.

As an investor, it is better to consider the long-term earnings potential for a business rather than trying to second-guess what might happen over the coming months.

Anyone owning the shares needs to feel confident Admiral will come out of the current choppy market waters intact. It has a reputation for putting customers first and has generated strong returns historically. Nonetheless, there is no guarantee it will continue to do well.

A key attraction for the shares is the income. The analyst consensus forecast is 117p per share in dividends for 2023, down from 157p in 2022 although the latter included a 45p special dividend from selling its Penguin Portals business. The current year forecast still implies a 5.2pc yield.

While it is possible to get a better return from cash if you are prepared to lock up your money for 12 months, equities come with the prospect of growth in both capital and dividends. The next big test for Admiral’s share price will be half-year results on 16 August.

Questor says: Hold

Ticker: ADM

Share price at close: £22.97

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