easyJet dives, but should you buy or sell?

It's been a busy few days at easyJet Towers. The week began with news of chief executive Carolyn McCall's departure in January for the top job at broadcaster ITV. Now, third-quarter results have given the budget airline's share price another substantial knock.

Three-month numbers actually beat forecasts, and easyJet shares briefly touched a post-referendum high of 1,444p within minutes of the bell.

However, on further reflection, and with the shares near a 13-month high and up 44% in 2017 so far, investors decided to cut and run, sending the price down 6% to a two-week low.

Results were a beat overall, with revenue of £1.4 billion for the past three months, significantly ahead of expectations. A revenue per seat increase of 2.2% was also better than the slight decline expected.

City analysts have prepared full-year upgrades after company guidance for pre-tax-profit rose to between £380 million and £420 million.

It also received a boost regarding its new European base with news it has received approval to establish a new airline based in Vienna, Austria. "That means our flying rights in Europe will be secure after the UK leaves the EU," explains McCall.

"Although we expect capacity to continue to put pressure on yields, our progress this year has enabled us to upgrade this year's PBT forecast and demonstrates that after a difficult 18 months of external challenges easyJet once again has positive momentum," the outgoing boss added.

But Easter shifting to April provided a "significant benefit" and we're warned the short-haul market remains fiercely competitive.

Broker reaction was mixed, though the overwhelming view seems that at multi-month highs the stock is fully priced. UBS has a 'buy' rating but its target of 1,425p implies little potential for upside. Cantor Fitzgerald also says 'buy', but its target is under review while it upgrades forecasts.

The bear case seems much more compelling, though. Mark Irvine-Fortescue at Panmure Gordon worries that ramping up capex means the dividend, expected to be 32.8p in 2017 yielding 2.5%, could be left uncovered by free cashflow.

Both he and Liberum's Gerald Khoo reckon the market currently prices in substantial full-year upgrades. New guidance implies only a 7% uplift.

A forward price/earnings (PE) of around 18 times doesn't look particularly cheap, neither relative to its five-year average of 11.2 times nor Ryanair's 15.3 times on Liberum's estimates. Ryanair also has "better earnings growth, momentum and return on invested capital", adds Khoo.

McCall will be a big loss - the share price has more than trebled on her watch. Chairman John Barton expects to be able to "select from a strong range of candidates".

Royal Mail CEO Moya Greene is parachuted onto the no-frills carrier's board six weeks earlier than expected to help in the hunt for McCall's replacement.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.