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After yesterday’s trading update EasyJet is being touted as a great buy. We don’t see it that way…
Let’s take a deeper dive into yesterday’s full year numbers and the company’s short-term outlook.
Falling Pre-tax Profit
In line with guidance provided back in early October (06/10), management yesterday confirmed that 2016 pre-tax profit would be $495m, 28% lower than the year prior. Other key takeaways from the update were as follows:
*All percentage changes are measured against 2015 full year numbers.
- Passenger numbers increasing 6.6% to 73.1 million,
- Revenue per seat declining to £58.46 (a 6.4% decline and 6.9% decline at a constant currency basis),
- Cost per seat excluding fuel costs increasing to £38.31 (a 2.6% increase and 1.1% decline at a constant currency basis).
Despite 2016 bringing a somewhat poisonous cocktail of i) Brexit, ii) terrorist attacks and iii) air traffic control strikes, management put on a brave face and stressed the medium term growth prospects for the airliner. To be fair EasyJet did add 106 network routes in 2016 (higher than in 2015).
Where does this leave us?
Looking at ‘1 year daily candle price chart (below), we can see that the shares have been in a clear downtrend throughout the year.
The Brexit driven selloff catches the eye. The magnitude of the selloff is unsurprising given drop in the pound and the doomsday scenario’s investors were pricing in.
Prices gapping lower, decisively rejecting intraday highs and closing down just under 7% following the October 6th update is another key price candle.
Focusing on recent price action, we can see that throughout October and November the shares have been retracing steadily higher in a tight ascending price channel. This counter-trend price action coincides with a fall in the oil price.
Time to Sell?
Firstly, any investor looking to go long EasyJet would be calling the bottom of a near 2 year downtrend. Yes, recent price action has been bullish. However, we see the October / November uptick as a healthy retracement within a long term downtrend.
Instead of looking to go long, we are waiting for signs of bearish momentum to return i.e. breaking below the ascending price channel. That said, with this yet to happen, will be sitting on the side lines for now.
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