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Share price shockers at easyJet and the Royal Mail

By Chris Bailey | Tuesday 2 October 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

A rough old start for certain large cap UK equities this week. Tom has already commented on Ryanair (RYA) and today's September traffic from the same company does nothing to encourage me to bottom fish here. By contrast, the knock-on impact on easyJet (EZJ) shares - which I loved up on these pages on Saturday - has been pretty savage, pushing the shares down 10% odd since the Friday close…

I would say this is more opportunity than threat unless you are very pessimistic about the future UK-Europe relationship, as I talked about on Saturday, especially with the share now clearly on a single digit EV/ebit rating. If easyJet has been all over the place, then Royal Mail (RMG) has had an absolute shocker, falling a quarter since late yesterday afternoon. Why the big fall?

Well the Royal Mail story has always been one centered on cost cutting because even with parcels growth (linked with e-commerce) there was not much growth going on - hence my previous observations that it is a utility-heavy stock. So spot the trouble if the 'UK productivity performance (is) significantly below plan (and)...2018-19 cost avoidance target lowered from £230m to £100m'.

The net impact of all this? New profit expectations stand at £500 million (to £550 million), which is around a 20-25% downgrade, putting the stock at around a x8 EV/ebit ratio with a 6%+ dividend yield. I see there are a few brokers questioning whether the 6%+ dividend yield is now sustainable or not.

The Royal Mail is fortunate that it does have a strong balance sheet, so my instinct today would be not to worry too much about this. Far more important is whether the new CEO is presiding over a complete internal crisis or not, especially as the critical holiday season is not too far away. I kind of want to buy it here because a x8 rating and a big dividend for a utility stock - albeit one that is spluttering a bit - can still work. However, if you put a gun to my head and asked me to choose one, I would pick easyJet over it. Better growth realities always matter over time.

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