Shares in budget airline Wizz Air (LSE: WIZZ) tanked over 12% in early trading this morning after the company trimmed profit expectations in light of lower air fares and poor weather. Nevertheless, thanks to the companys seriously low valuation, strong financial position and plans for growth, I seetodays adverse reaction asyet another opportunity for risk-tolerant, patient investors to climb on board.
The price of prudence
Sure, initial impressions werent good.Despite reporting a 104% rise in pre-tax profits to33.1m, underlying net profit at the Hungary-based carrier fell 22% to 13.5m. This news was compounded by the announcement that the companywouldnow reduce its guidance on net profit for the full year by 20m, with the expectation that this would now be in the region of225m-235m.
Lookingbeyond the headline profit figure however, there was still much to like about how Wizz Air has performed over the last quarter.
For the three months ending 31 December, total revenue rose a very respectable 9.9% to 341.1m with ticket and ancillary revenues rising 2.5% (191.8m) and 21% (149.4m) respectively. Overall passenger numbers increased by 20.1% to 5.7m cementing the 1bn caps position as the leading budget carrier inCentral and Eastern Europe while the companys package holiday unit (Wizz Tours) also reported a cracking 306% increase in revenues to3.7m. Crisis? What crisis?
While todays cautious tone may concern some investors, I think theinitial reaction was overdone. After all, a sharp fall like that seen this morning is usually indicative of serious problems at a single company. For evidence of this, check out the recent share price performance of businesses like BT and Pearson. Bycontrast, Wizz Airs current problems are either temporary (bad weather) orshared by all airlines (low prices).
While the former is beyond the companys control, I see no reason to doubt its ability to compete with peers such as easyJet (LSE: EZJ), particularly as the former now expects to grow capacity at the higher end of previous guidance (20%) for the 2016/17 financial year. Indeed, with new routes being added (26 in Q3) and a growing fleet of aircraft, Im left wondering if the company might still surprise the market over the next couple of years.
In addition to the above, Wizz Air also has a long history of generating consistently high levels of return on the capital it invests. Indeed, its most recent figure(25%) is higher than that achieved by its Luton-based peer(13%). With a total cash position of 892m at the end of Q3 746.8m of which wasfree cash Wizzs Air balance sheet also continues to be in rude health.
Things get even more tempting when Wizz Airs current valuation is considered. Like the majority of airline stocks, its shares currentlytrade in bargain territory atjust10 times earnings for 2017 and 2018. Anestimated price-to-earnings growth (PEG) ratio of just 0.76 for 2018 makes the investment case even sweeter.
All this before weve even considered the elephant in the room, namely Brexit. Although our impending exit from the EU may continue to weigh on sentiment towards the industry, Wizz Airs lack of dependence on the UKalso meansthat it may not face quite the same headwinds as some of its budget competitors if and when Article 50 is eventually triggered.
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Paul Summers owns shares in easyJet. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.