Are Wizz Air shares a bargain?

Smiling black woman showing e-ticket on smartphone to white male attendant at airport

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Wizz Air (LSE: WIZZ) shares have dropped by 40% compared to their peak in May and are back to their starting point at the beginning of 2023.

Despite the decline in share value, the airline industry is recovering quickly from the Covid-19 pandemic, and Wizz Air is no exception. The company trades relatively cheaply at a forward price-to-earnings (P/E) ratio of just 7.2, as it is expected to return to profitability in fiscal 2024. Could this be a good time for me to buy?

What is wrong with Wizz Air?

The Covid-19 pandemic has posed tremendous challenges for Wizz Air and the entire travel sector in the last three years. Despite that, the airline business is making a remarkable comeback.

On 3 August, the company released its Q1 results for fiscal year 2024, which were nothing less than impressive.

During Q1, the airline saw a massive 52.9% revenue growth to €1.236bn and a 25.3% rise in passengers for a total of 15.3 million. However, shareholders should draw their attention to the outlook provided by the company, which I believe hides the genuine opportunity for the stock.

In fiscal 2024, the management anticipates that this will be the first year since fiscal year 2021 that the company will return a profit. According to the first quarter report, the business expects a net profit between €350m and €450m this year.

Valuation

The business seems relatively cheap compared to some of its major competitors, such as easyJet, trading at a forward P/E ratio of 8.7, and way more of a bargain compared to Ryanair, trading at a forward P/E ratio of 10.2.

Moreover, the firm has already hedged 64% of its fuel for fiscal 2024 at prices between $834 and $958 per metric ton, slightly below some of the prices for jet fuel we have seen recently.

Additionally, Wizz Air’s cash position has increased by 17.2% to €1.79bn compared to last year.

I believe that Wizz Air stock has the potential to be among the best performers in the next couple of years but, just like any investment, there are risks that should be considered.

Risks

Jet fuel prices are a key component of the cost of travel. Although the company has hedged almost two-thirds of its expected fuel expenses, any $10 move in price per metric ton can impact the fuel costs by $16.2m.

Besides, on 11 September, shares of Wizz Air took another hit, as the company announced that it estimates a potential 10% capacity reduction during the second half of fiscal 2024 due to the inspection of Pratt & Whitney’s engines. Last but not least, the company is among the biggest operators in Europe. The recent weakness in European economies could negatively impact the number of people willing to travel.


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