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EasyJet (LSE: EZJ) shares came up with a surprise late summer. The airline's share price rose 16% since the end of July to stand at 519.2p.
The latest gains will be music to the ears of pre-Covid shareholders who have watched the share price fall 46.6% over the past five years. But, there are two important questions for me here.
First, what is driving the recent gains? Second, how does the company's current value stack up against the market?
Are you ready to go?
Let's start with the latest rally. Shares in the budget airline caught my eye after rising in August. I was curious if this was the beginning of a fundamental change or if something else was at play.
The company announced an increase in pre-tax profit for Q3 on 24 July, up 16% to £236m. While that's good news, it comes after a period of negative results.
I think the other big thing here was to do with easyJet's FTSE 100 situation. The struggling carrier was widely tipped to be kicked out of the large-cap index in a recent restructuring. However, it managed to hold on to the hundred.
That's good news in terms of analyst coverage, the merits of institutional portfolios, and exposure to exchange-traded funds, which are good for demand.
Measurement
One thing to celebrate is the company's price-to-sales (P/S) ratio. The stock has a P/S ratio of 0.45, which means easyJet shares look on the cheap side.
However, the share price was reduced during the pandemic and has not recovered to anywhere near that 1,270p level since then.
One of the closest comparisons to the exchange is our fellow budget airline, Wizz Air (LSE: WIZZ). Wizz has a market cap of £1.4bn compared to troubled EasyJet's £3.9bn by 2024.
Wizz air's share price has fallen by 45% since June 12. That came after a soft trading update for the quarter showed a 44% drop in operating profit to €44.6m. The airline also lowered full-year profit guidance from €500m-€600m to €350m-€450m.
Wizz shares have a P/S ratio of 0.41, so both planes are in the same ballpark, Wizz takes the edge here.
Are easyJet shares in the shopping basket?
Let's start with relative value versus the likes of the Wizz Air. I think I would give easyJet share the nod based on a healthy balance sheet. The short-lived company is valued at £146m and liquidity looks strong compared to Wizz's total debt.
easyJet shares are also dividend-paying which may attract some investors, although the dividend yield of 0.9% is nothing to write home about.
In terms of the bigger picture, I'm wary of buying easyJet shares right now. Although the passenger numbers have been increased, I think the critical situation in the FTSE 100 presents a short-term risk.
With the UK and Europe teetering on the brink of recession, I'm not doing too well. I see this as something to consider if we see easyJet drop from the FTSE 100. I would also like to see an upward trend in earnings and profits while maintaining that strong balance sheet.
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