Should I buy easyJet shares after a few volatile weeks?
The easyJet (LSE: EZJ) The share price has jumped everywhere over the past two weeks. Volatility is to be expected as the company has given investors plenty to think about. These include a rights issue, a trading update and the rejection of a takeover bid. Through it all, should I be thinking about buying easyJet shares now?
The question of rights
Last week, easyJet announced to the market its intentions to raise funds with a rights issue. A rights issue is a fairly simple and common way to raise funds through the stock market.
In short, it is the company offering existing shareholders the opportunity to buy more shares of the company. In order to make it attractive, new shares are generally offered at a reduced price. The difference between the current price and the discounted price is called the value of the right. Investors can either accept the offer or sell the right to someone else.
For easyJet, the rights issue is expected to raise £ 1.2 billion, with existing shareholders having the option to buy 31 shares for 47 shares already held. This discount should be around 35%.
In theory, it is at the ex-rights price that easyJet shares should find fair value. However, in practice this does not always happen and stocks may trade higher or lower than the theoretical price should be once the dust settles.
Other news to digest
What was more interesting to me was the other news that came out. First of all, I thought the trading update offered a positive outlook. The company has indicated that it expects “Capacity in Q4 2021 will be around 57% of Q4 2019 levels, which is a significant increase over Q3 2021, when easyJet flew 17% of capacity in Q3 2019.”
In fact, in August the UK’s domestic capacity reached 105% of 2019 levels for the company. These ratings show that although the company is not yet operating at full capacity, the trend is positive.
Finally, the easyJet title also had to react to an unsolicited takeover bid. The bidder was not specifically mentioned, but insider reports claim it was from a competitor Wizz Air. Either way, the decision was made to reject the offer as it undervalued the company. Still, the fact that another company wants to buy easyJet shows that there is value there.
Lack of conviction on EasyJet shares
Overall, I don’t think the outlook for easyJet shares has fundamentally changed over the past two weeks. The issuance of rights allows more capital to be raised, which allows the company to relieve pressure on cash flow during times of low demand. The trading update is overall positive, but didn’t really surprise me. The takeover bid was rejected and is therefore not expected to impact the value of the shares in the future.
I think easyJet shares could be a good buy for my portfolio in the long term, but could easily go down further depending on how the winter goes with Covid-19. Therefore, I will stay on the sidelines despite recent volatility until I see more clarity on the impact of Covid-19 on the airline.
jonathansmith1 does not hold any positions in the companies mentioned. The Motley Fool UK recommended Wizz Air Holdings. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.