Easy Jet?

Possible Value

I have been keeping an eye on Easy Jet (EZJ.L) for a few months ever since its spectacular fall at the start of 2016; over the year there has been significant under performance relative not only to the FTSE-100 but also its sector.

ezj-relative

Having thought about a purchase in August and not acting the initial rally back towards £12 per share left me feeling that I may have missed out, but a reversal back to the lows has made me think again. Whilst I will undertake a more extensive review the chart below is a good indicator and shows the following: –

Top Chart – Share price and EPS 

Bottom Chart – Cyclically Adjusted PE Ratio with Standard Deviation Lines at plus and minus 1, 1.5 and 2 from the 4 year average

ezj-cape

With the CAPE now well below the four year average of around 33x and dipping over two standard deviations from this a reversion to mean could result in a sizeable rise in price.

  • 4 Year CAPE Average is 30x
  • Cyclically Adjusted EPS is 0.6011
  • CAPE = Price / Cyclically Adjusted EPS so
  • Price = CAPE x Cyclically Adjusted EPS
  • A reversion to the average would imply a price of 30 x 0.6011 = £18.03
  • Gain from current price would be circa 74%

Nothing is guaranteed but never underestimate mean reversion! With a bit more research I may well be adding this to the model portfolio.

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