Is WizzAir one of the best value stocks on the market?

In the ever-volatile world of airline stocks Wizz Air (LSE: WIZZ) has caught the attention of many value investors recently, myself included. Despite industry-wide headwinds, this low-cost carrier could present an interesting opportunity for those willing to navigate through some turbulence. So is it really a flight to keep an eye on for its long-term growth, or is it undervalued for a reason?

The company

Founded in 2003, the airline has grown into a major player in the European air transport market, building a strong presence in Central and Eastern Europe with a fleet of 208 aircraft and connections to around 200 destinations in 50 countries. However, like many of its competitors, the company has recently fallen on difficult times.

The shares lost 27.8 percent last year, slightly lagging behind the performance of British airlines, which suffered a decline of 27.2 percent.

In my opinion, many investors still have reservations about the sector as many still remember the sharp declines during the lockdowns.

Evaluation

One of the most compelling aspects here is the valuation. Shares are trading at a staggering 74.7% below their estimated fair value based on discounted cash flow (DCF), suggesting lucrative returns if management can navigate the next few years successfully. This becomes even more interesting when you consider that the company recently turned profitable, posting profits of £318.96 million 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 is also favorable compared to the industry, further underscoring its potential value proposition.

The future

The share price has been volatile over the past three months, reflecting uncertainty in the airline industry. The company also has an extremely high debt-to-GDP ratio of 696.2%. In an uncertain time when interest rates are at an all-time high and political stability is questionable, I am nervous about what management would do if debt became a growing problem. The combination of volatility and uncertainty is not a good combination historically, and it would not take much for investors to look elsewhere for yield.

The story goes on

Despite these risks, its low-cost carrier business model is well positioned to gain market share when travel demand recovers. The company’s focus on Eastern European markets, which are generally less saturated than Western European routes, could open up growth opportunities that more established airlines may struggle to match.

The latest financial results also give cause for hope. With a net profit margin of 7.42% and revenue of £4.30 billion over the last twelve months, the company has demonstrated its ability to generate profits in a difficult environment. I like what I see here, but for it to make sense, I want to see this trend continue over the next few years.

Better opportunities elsewhere

Wizz Air clearly faces significant challenges, but its current valuation and growth prospects make it a riskier airline for investors to consider. The airline industry is notoriously cyclical, and the company’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 company’s high level of debt and the general volatility of the airline sector. I think there are probably safer investments out there, even though this one has a lot of potential.

The post “Is WizzAir one of the best value stocks on the market?” first appeared on The Motley Fool UK.

further reading

Gordon Best does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024