EasyJet shares ascend after forecast boost

EasyJet shares quickly ascended to the top of the FTSE 100 index after the airline boosted full-year profit expectations.

Britain’s largest airline by passenger count said it now expected pre-tax profit to be in the range of £575m to £580m, compared with a £545m-to-£570m range set at the time of its third-quarter results in July.

It cited lower than expected fuel costs, favourable currency moves and a strike at a rival airline for the probable increase in profits above previous expectations.

Before Friday’s update, analyst consensus forecasted a pre-tax profit of £566m for the year through September.

Results for the year are due to be released on 18th November.

EasyJet said its unit fuel costs in the six months to September would be £2m lower than during the same period a year ago, while exchange rate movements were expected to have a beneficial impact worth about £15m.

At current rates, easyJet said its fuel bill for its next financial year would be about £50m below the current year, but negative currency effects during the same period might cause a £20m hit to earnings.

EasyJet noted a recent strike by Air France pilots was likely to have added £5m to revenues after customers switched flights or bought tickets for flights by the UK-based company instead of the French one.

EasyJet is having a great year

EasyJet seems to be having a great year as a company and that’s translating into a good year for its shareholders.

Both EasyJet and its main budget rival Ryanair are weathering the effects of an increasingly fierce pricing competition in the European short-haul market.

Both are no doubt enjoying the benefits of their relatively greater scale than competitors in Europe.

This is enabling each to pick the battles in which they’ll ‘invest in margin’ (perhaps Ryanair more so).

During the summer, EasyJet moved to close the investment gap to its main low-cost rival by sharply increasing its dividend, signalling confidence in its future at a time when many airlines have shelved their own pay-outs as they struggle with increasing competition in the sector.

EasyJet said it would increase its dividend to 40% of pre-tax profit compared to the one third of pre-tax profit it paid out to investors before.

A new dividend, based on the new ratio, will be declared with easyJet’s full-year results, though the airline has yet to firm up plans for a special dividend of £175m it pledged to pay out in November last year.

Still, easyJet’s new dividend ratio puts it ahead of Ryanair, which does not currently appear to have a steady dividend policy, although Ryanair’s prospective twelve-month dividend yield equates to 2.3%. That compares with easyJet’s prospective yield of 3.5%.

With the good news of the summer from easyJet about its steady progress we might expect its stock to have performed more strongly.

In fact, easyJet Plc. is posting a mild loss of 5.6% over the year to date whilst over 52 weeks there’s a modest gain of about 10%.

Looking at the current forward price/earnings ratio, we see there is a moderate discount in the stock against this year’s expected earnings, but despite the firm’s optimism the market expects flat growth at best for the full-year of 2015.

Perhaps, investors are less optimistic about the basic mathematics of the pricing environment than the airline.

Still, the shares appear to have lots to go for in the near-to-medium term, having this week escaped the falling trend channel they entered in April amid good buying momentum.

The next major challenge for the stock will of course be the currently out-of-place 200-day moving average, now at 1521.3p.

EasyJet shares are currently up 5.4% at 1445p.

They are also lifting the shares of other FTSE 100-listed airlines in their slipstream.

Shares of International Consolidated Airlines Group, owner of British Airways and Iberia, are up 1.8%, whilst Ryanair shares are 1.6% higher.