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In the ever-volatile world of airline stocks, Wizz Air (LSE: WIZZ) has recently caught the attention of many value-seeking investors, myself included. Despite facing industry-wide headwinds, this low-cost carrier might offer an intriguing opportunity for those willing to navigate through some turbulence. So is it really one to watch for long-term growth, or is it undervalued for a reason?
The company
Founded in 2003, the airline has grown to become a significant player in the European aviation market. Operating a fleet of 208 aircraft and connecting approximately 200 destinations across 50 countries, it has established a strong presence in Central and Eastern Europe. However, like many of its peers, the business has faced challenging times recently.
The shares declined by 27.8% over the past year, slightly underperforming the UK airlines industry, which saw a 27.2% drop.
To me, many investors still hold reservations about the sector, with many still remembering the sharp drops experienced during lockdowns.
Valuation
One of the most compelling aspects here is the valuation. The shares are trading at a staggering 74.7% below a discounted cash flow (DCF) estimate of fair value, suggesting lucrative returns if management can navigate the next few years successfully. This becomes even more interesting when considering that the company recently turned profitable, with earnings of £318.96m reported in the last year.
Looking ahead, analysts forecast earnings growth of 18.35% per year for Wizz Air. The company’s price-to-earnings ratio of 6.7 times also compares favourably to industry peers, further underlining its potential value proposition.
The future
The share price has been volatile over the past three months, reflecting the uncertainty surrounding the airline industry. The company also carries an extremely high debt-to-equity ratio of 696.2%. In an uncertain period, where interest rates are at recent highs and political stability is questionable, I’m nervous about what management would do if debt became a growing issue. The combination of volatility and uncertainty isn’t a great match historically, and it wouldn’t take much for investors to look elsewhere for returns.
Despite these risks, the business model as a low-cost carrier positions it well to capture market share as travel demand recovers. The company’s focus on Eastern European markets, which are generally less saturated than Western European routes, could provide avenues for growth that more established carriers might struggle to match.
Recent financial performance also offers some encouragement. With a net profit margin of 7.42% and revenues of £4.30bn in the trailing 12 months, the company has demonstrated its ability to generate profits in a challenging environment. I like what I see here, but for it to be meaningful, I want to see this trend continue for the next few years.
Better opportunities elsewhere
Wizz Air clearly faces significant challenges, but its current valuation and growth prospects make it one more risk-friendly investors may want to consider. The airline industry is notoriously cyclical, and the firm’s position as a low-cost carrier could allow it to benefit disproportionately from a recovery in travel demand.
However, I don’t like the look of the company’s high debt levels and the overall volatility of the airline sector. I feel there are probably safer investments out there, even if this one has a lot of potential.
