Is the easyJet share price and 6% yield a bargain, or should I buy this FTSE 100 growth share?
The Motley Fool
Published Nov 25, 2018 10:00
Updated Nov 25, 2018 10:16
The prospects for a number of FTSE 100 shares appear to be relatively uncertain at the present time. Investor sentiment has deteriorated significantly in recent months, and this trend could continue as the full impact of tariffs and rising US interest rates may not yet have been felt.
Against this backdrop, the investment potential of shares such as easyJet (LSE: LON:EZJ) remains uncertain. The company has a high yield and a bright profits growth forecast, but investors remain cautious about its outlook. Could another FTSE 100 share therefore offer superior long-term prospects?
Improving outlook The company in question is online takeaway ordering service Just Eat (LSE: JE). It has been able to deliver stunning profit growth in recent years, with various acquisitions complementing organic growth as it seeks to become a more diversified business. Given the uncertain prospects for the UK economy, this could be a shrewd move in the long run.
Of course, online takeaway ordering is becoming more popular. This is partly because of improved technology, with the company spending heavily on its mobile offering and the process through which orders are received and delivered. And while the outlook for the dining out sector could be challenging, many increasingly price-conscious consumers may end up trading down to takeaways as they seek to reduce household expenditure during the Brexit process.
Looking ahead, Just Eat is forecast to post a rise in earnings of 26% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 1.3, which suggests to me that it could offer growth at a reasonable price. As such, it could have investment appeal for the long run.
Uncertain prospects The future for the wider airline industry may have contributed to recent weakness in the easyJet share price. The oil price has dipped of late, but it has still contributed to rising costs for operators across the sector. This could have a significant impact on budget airlines which have customers who are more price-conscious, and could mean that the companies themselves need to absorb rising costs.
Despite this, easyJet’s recent update showed that it has a disciplined position on costs and is offsetting this with strong passenger growth. This trend could continue over the medium term, with the company’s overall strategy leading to rising load factors.
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With the stock forecast to post a rise in earnings of 18% in the current financial year, it has a PEG ratio of just 0.6. This suggests that there could be a margin of safety on offer, and that the company may offer growth potential. Alongside this, it has a 6% dividend yield which is covered around twice by profit.
As such, while Just Eat may have strong long-term growth prospects, easyJet appears to offer growth at a very low price. It could outperform the wider index over the coming years, in my opinion.
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Written By: The Motley Fool
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