One growth stock I’d buy and one I’d sell

Wizz Air

At the end of June last year, shares in low-cost European airline group Wizz Air Holdings (LSE: WIZZ) lost nearly a third of their value in a single day for no apparent reason, showing just how concerned investors were about the company and its prospects.

However, it seems that investors have warmed to Wizz’s growth story over the past 12 months. Indeed, after the 30% decline, shares in the company have gone on to add 62%, taking them to an all-time high.

Flying high

Shares in the low-cost airline jumped by around a quarter at the end of last week after the company announced its audited results for the full year ended 31 March 2017. It reported profit growth of 28% for the period and a load factor of 90.1%, despite the fleet growth of 12 planes. The number of passengers carried increased 19% to 23.8m, and the group’s profit margin rose 2.2 percentage points to 15.7% from 13.5%.

There’s no denying these figures are extremely impressive. While the rest of the airline industry is struggling to improve load factor, cut costs and increase customer satisfaction, Wizz Air seems to be growing without much additional effort. Today the company reported yet more positive passenger statistics. For May, capacity rose by 20.9% year-on-year and the number of passengers carried increased 22.2% year-on-year. Load factor increased from 90.1% in May 2016 to 91.1% in May 2017. Looking at these figures, it seems as if there is still plenty of room for Wizz to expand as more customers flock to the company’s offering and there’s no sign of overcapacity just yet.

Struggling against headwinds

As Wizz grows, the company’s UK peer, EasyJet (LSE: EZJ) looks as if it has hit a patch of turbulence. EasyJet virtually invented the low-cost no-frills airline model but the model is easy to replicate and competitors, seeing how profitable it has become, have rapidly adopted the same operating style. Wizz Air’s rapid expansion and surging profitability is an obvious example.

Unfortunately, it seems as if easyJet’s success will prove to be the company’s undoing. Earnings per share fell by 22% last year, and City analysts have pencilled-in another decline in earnings of 28% for the financial year ending 30 September. Management has blamed increased competition as one of the reasons behind the decline in profitability, and it doesn’t look as if this headwind is going to abate any time soon. With this being the case, the company’s current valuation of 17.8 times forward earnings seems extremely expensive, especially when you consider that earnings per share are to fall by around a third this year. On the other hand, shares in Wizz Air look cheap trading at a forward P/E of 12.6, falling to 11.2 for the following year as earnings per share grow by a double-digit percentage.

Overall, considering Wizz Air’s faster growth rate and lower valuation, it might be time to disembark from easyJet and board Wizz Air.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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.

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