Stocks

Should I buy easyJet shares following a volatile couple of weeks? – The Motley Fool UK

The easyJet (LSE:EZJ) share price has been jumping all over the place during the past couple of weeks. The volatility is to be expected, as the company has given investors a lot to think about. These include a rights issue, a trading update, and a rejection of a takeover bid. Through all of this, should I be thinking about buying easyJet shares now?

The rights issue

Last week, easyJet released to the market its intentions to raise funds with a rights issue. A rights issue is a fairly straightforward and common way of raising money via the stock market.

In short, it involves the company offering existing shareholders the ability to buy more shares in the firm. In order to make it attractive, the new shares are usually offered at a discounted price. The difference between the current price and the discounted price is known as the value of the right. Investors can either take up the offer, or sell the right to someone else. 

For easyJet, the rights issue is expected to raise £1.2bn, with existing shareholders being given the option to buy 31 shares for every 47 already owned. This discount is expected to be around 35%.

In theory, the ex-rights price is where easyJet shares should find a fair value. However, in practice this doesn’t always happen and stocks can trade higher or lower than where the theoretical price should be after the dust settles.

Other news to digest

What was more interesting to me was the other news that came out. Firstly, I thought the trading update offered a positive outlook. The company noted that it expects “capacity in Q4 2021 to be approximately 57% of Q4 2019 levels, which is a significant increase compared to Q3 2021, when easyJet flew 17% of Q3 2019 capacity.”

In fact, August saw UK domestic capacity at 105% of 2019 levels for the business. These notes show that although the business is not firing on all cylinders yet, the trend is positive.

Finally, easyJet shares also had to react to an unsolicited takeover bid. The bidder wasn’t specifically mentioned, but reports from insiders are claiming it was from competitor Wizz Air. Regardless, the decision was made to reject the bid, as it undervalued the company. Still, the fact that another firm wants to buy easyJet shows that there is value to be had there.

Lacking conviction on EasyJet shares 

On balance, I don’t actually think the outlook for easyJet shares has fundamentally changed over the past two weeks. The rights issue allows for more capital to be raised, enabling the business to ease cash flow pressures during periods of low demand. The trading update is broadly positive, but didn’t massively surprise me. The takeover bid was rejected, so shouldn’t impact the value of the shares looking forward.

I do think that easyJet shares could be a good buy for my long-term portfolio, but could easily fall further depending on how the winter goes with Covid-19. Therefore, I’m going to remain on the sidelines despite the recent volatility until I see more clarity on the impact of Covid-19 on the airline.

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jonathansmith1 has no position in any firm mentioned. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.


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