It’s the ‘Summer Holiday Season’; also known as ‘The Silly Season’, when we all turn to trivia, rumours and speculation to fill the news void created by…the ‘Summer Holiday Season’…
Rumours loosely based on the ‘holiday’ theme are even better, it seems.
Cue a spike in shares of solid but troubled discount carrier EasyJet (LON:EZJ).
It is exposed to Brexit in myriad ways. Fears include that it will lose EU certifications; that Europeans won’t fly into the UK as much, and that Brits won’t fly out so much.
These have pushed its stock some 36% lower in the year to date, leaving it among the relatively few British blue-chips to miss out on a spirited comeback of stocks in the weeks following the referendum.
Friday’s report in The Times that a little-known aircraft lessor called AerCap (NYSE:AER) was eyeing the group up for a possible takeover was succour for downbeat investors, but unlikely to fly.
Investors, as ever, were wiser as a crowd: easyJet shares got nowhere near the mooted takeout price of £16 a share on Friday, despite rising as much as 4.6%.
There is a patina of plausibility of course. US-listed AerCap Holdings is the world’s largest independent aircraft leasing group. Plus, investors are primed for further tales of eye-catching opportunism and diversification, like the summer’s biggest takeover story which saw Japan’s Softbank swoop on ARM Holdings (LON:ARM), scenting blood after sterling’s rout.
Lift the lid on the hustle of the used aircraft trading and leasing industry though, and we find that AerCap, like its closest global rivals, is running a negative net cash balance and already indebted close to full enterprise value.
Revenues growing faster than capital costs are key for companies with such profiles. But following an opening gambit worth 7.7 times EZJ’s 2015 Ebitda, AerCap would probably have to pony up at least 8.5 times to have a hope of being taken seriously. That would alert the ratings agencies and risk AerCap’s grade falling deeper into junk territory than its current BBB- (at S&P).
Such risks tend to complicate the prospects of any suitor; note easyJet shares closed well of their best levels on Friday.
Investors can’t be blamed for seeking ways to soup up the share’s shallow ascent since late July, but thinking more optimistically, the tardy recovery actually looks promising.
Flat revenue growth and slowing (though still positive) profit improvement are certainly more than priced in by now, paving the way for an easier ‘beat’ of expectations when the group reports finals next month.
From a technical perspective, there is orderliness within the stock’s consolidative advance in an hourly channel, leaving EZJ above closely watched rolling averages (red dotted line: 21-hour; light blue line: 50-hour.)
- Destination—after a possible stopover at the 1128p monthly high—proven resistance at 1178p; where a previous take-off stalled on 14th July.
- Momentum (slow stochastic oscillator) is good.
- Engine failure at 1178p would surely risk a drift back down to current levels or even EasyJet’s Brexit nadir of 990p, though a crash is very unlikely.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.