2023-11-02 10:40:00 ET
Summary
- Jet2, a UK-based package holiday business, has reported record profits and expects double-digit growth in the coming years.
- Despite a low valuation and the retirement of Founder & Chairman Philip Meeson, the company's competitive advantages and earnings growth are expected to continue.
- There is potential for a share buyback, which could act as a catalyst for the stock.
The following segment was excerpted from this fund letter.
Jet2 ( OTCPK:DRTGF , Jet2.L)
Jet2 is a UK based package holiday business that operates its own airline. The company is run by CEO Steve Heapy and CFO Gary Brown, both of whom have high integrity, exceptional customer focus, and concentrate on long term value creation when allocating capital. They have done an outstanding job, with Jet2’s excellent customer service and retention driving profitable market share growth from 2% to 21% over the last decade. We initially invested in the business at around £5/shr, the stock trades at £11/shr today, and we think is worth £25/shr. The stock ended Q3 down 22% from its high earlier this year. We added significantly to our position in the quarter.
Jet2 reported record profits for the summer which imply EPS of around £1.8/shr for this fiscal year, double the pre-Covid peak of £0.9/shr.
When we first started highlighting Jet2 in our quarterly letters during the Covid pandemic three years ago, we estimated that the company would generate £1.5-£2.5/shr in earnings in three years’ time and that the stock would be valued at £25/shr as a result.
That appeared to be an aggressive estimate during a period when travel had largely halted, yet while we turned out to be correct in our earnings estimate we were wrong on the multiple investors would pay. We had assumed what we thought was a conservative 12.5x P/E multiple – in line with pre-Covid levels – for a business with the industry leading balance sheet, competitive position, and management, all of which have been further demonstrated in recent years.
Instead, Jet2 trades on 6x P/E. That is by some distance its lowest multiple in the last decade, excluding the pandemic. As a result, the stock trades at £11/shr rather than £25/shr, which is disappointing and the only number that matters.
A record low valuation would typically suggest investors believes earnings are about to decline significantly. However, that appears not to be the case despite the difficult macro backdrop. Sell-side estimates are for earnings next year to hit another record. The company appears to be on course for double-digit growth for some time, with orders and pricing still tracking at new record levels, recent ATOL registrations showing another 1ppt in market share growth, and the general travel outlook continuing to be strong.
We have seen macro headwinds impact the stock many times over the last decade, including this time last year in similar circumstances. Over the longer term the company’s competitive advantages and earnings growth tend to punch through that noise. Jet2’s market share has increased from 2% to 21% in the last decade and the stock has largely followed from £0.7/shr to £11/shr despite its current valuation. We believe that this time will be no different.
A more important setback in the quarter was the retirement of Founder & Chairman Philip Meeson, although the stock still traded at £12.6/shr prior to the announcement – at a then record low 7x P/E.
Meeson has been a truly outstanding Founder. He launched the company in 1983 with two aircraft and through a rare combination of both customer focus and cost control grew the business to a roughly £100mm valuation by 2009.
Meeson – a former RAF fighter pilot – hired Steve Heapy in 2009 to build a package holiday business to compliment Jet2’s airline. That has been an enormous success, with Heapy growing Jet2Holiday’s market share from 2% to 21% and the package holiday business accounting for the vast majority of the company’s value today in our view.
Despite Meeson being an undoubted loss to the leadership team, we believe the transition will be close to seamless. Heapy has run the package holiday business since its inception and been group CEO since 2020. He is supported by an excellent CFO in Gary Brown, who has been with the company since 2013.
Meeson’s replacement as Non-Executive Chairman will also be internal, with board member Robin Terrell taking up the position. Terrell has been Chairman of several companies and worked in several senior customer centric roles, including as Chief Customer Officer of Tesco and MD at Amazon. He knows the company well having been a board member for 3.5 years and we were impressed when we met with him.
One potential overhang to the stock is that Meeson continues to own 20% of the company and some investors may be concerned that a large sale of shares is coming at some point. We view that as very unlikely anywhere near today’s prices. In fact, Meeson made a point of buying more shares – the first time he has ever done so – after his retirement was announced.
We have also found that management are receptive to buying back shares. Perhaps the only pushback against Meeson we could offer is that similar to many founders he did not like the company to buy back shares, instead preferring to use cash to accelerate the growth of the business even on occasions when the stock dipped to very cheap multiples.
However, we estimate that Jet2 generates enough cash that it can take advantage of the current 6x P/E multiple to buy back shares while continuing to invest in the business. We believe that a buy back would be an excellent use of cash and act as a catalyst for the stock.
Our thesis continues to be based on Jet’2 long-term intrinsic value as it expands upon its position as the UK’s leading package holiday provider. We estimate the company will continue to grow earnings at a double-digit rate over the next 3-5 years and trade for a double-digit multiple at some point.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Plural Investing - Jet2: Long-Term Intrinsic Value And Double-Digit Multiples