Is high-flying easyJet undervalued?

Budget airline easyJet has executed a quick turnaround worthy of its speediest pilots. After a soft third-quarter profits warning, the carrier has beaten full-year earnings expectations raised to £575-£580 million just a month ago.

Revenue rose 6.3% to £4.5 billion, generating pre-tax profit of £581 million, up by over a fifth. And the group's efficiency at turning revenue into profit improved too, with margin up 160 basis points to 12.8%. Yield-hungry investors - and major shareholder Stelios Haji-Ioannou - were kept happy, with the dividend up by over a third to 45.4p.

Clearly, easyJet is putting more bums on seats. Almost 65 million passengers flew with the budget airline last year and the load factor - a measure of how well its planes are filled - rose by 1.3 percentage points to 90.6%. At constant currency levels, the cost of each seat rose to £37.70, driven by charges at regulated airports. It would have been more but for easyJet's "lean initiatives", which saved it £32 million this year.

"easyJet has continued to execute its strategy, delivering another strong performance and enabling easyJet to deliver record profits for the fourth year in a row," said chief executive Carolyn McCall. "We are also proposing to increase the proportion of our profits after tax paid in dividends from one third to 40%, reflecting our confidence in the future of easyJet.

"Our performance demonstrates our continued focus on cost and progress against every strategic revenue priority. Our people are fully aligned behind our strategy and this gives us strong momentum to continue delivering," she added.

Confident that it can deliver sustainable growth and returns, management expects to grow capacity by around 3.5% in the first half of the current financial year and by around 5% for the full-year. Forward bookings for the six months are already slightly ahead of last year, and although first-half revenue per seat is set to be flat, or slightly higher, anticipated yield improvement at Gatwick should benefit the full-year.

Broker Panmure Gordon remains positive:

We retain our Buy recommendation with an 1,800p target price. The shares remain attractively valued in our view, trading on prospective earnings multiples of 12x 2014/15 and 11x 2015/16, well below the average prospective P/E over the past 10 years of 14.8x. The dividend yield is 3.0% for 2013/14, rising to 3.3% for 2014/15.

Lower fuel prices will eventually feed through, too, and that rating does indeed appear modest for a quality operator like easyJet. Although the share price is trading marginally lower after the update at 1,526p - down from 12-month highs of 1,828p - it's still up by over a quarter since their August low. There's also technical support at the 200-day moving average.

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